Lower growth in economic activity next year; high inflation to persist

Following a strong post-pandemic recovery, economic growth will remain high this year at 5%. Economic growth is expected to slow to 0.8% next year, primarily due to significantly lower growth in private consumption and a drop in private investment. Growth will rebound and exceed 2% in 2024 and 2025 in the context of the expected stabilisation of conditions in international environment. The pace of economic growth is also reflected in labour market projections. In parallel to moderated growth, Banka Slovenije expects price growth to remain well above its inflation target in 2023 and 2024, primarily due to higher contributions from core inflation and growth in food prices, and to converge towards that target in 2025.

Slowdown next year after this year’s favourable economic growth

Economic growth will remain relatively high this year at 5%, largely on account of the technical effect of the carry-over of growth from 2021, while deteriorating macroeconomic outlooks at home and abroad are already being reflected in the within year’s growth.

Economic growth is expected to slow to 0.8% next year, primarily due to significantly lower growth in private consumption and a drop in private investment. In the context of marked slowdown in domestic demand, import growth is expected to decrease faster than export, which after two years will again lead to the positive contribution of net trade. As private spending slows, investment and government consumption will contribute meaningfully to maintaining growth.

With the expected stabilisation of the geopolitical situation, the easing of supply chain pressures and slowing growth in import prices, a gradual recovery in economic activity is expected from the second half of 2023 on and approach potential output growth in 2024 and 2025, when GDP growth is projected to be 2.4% and 2.3% respectively.

Pace of economic growth will be reflected in the labour market dynamics

Employment growth will reach 2.4% this year, and then fall to 0.4% in 2023. Mismatches between supply and demand in the labour market remain pronounced and are expected to persist going forward. On this basis, employers are expected to be less inclined to lay off workers, despite slowing economic activity, while at the same time the continued shortage of workers is expected to hinder a more rapid employment growth in 2024 and 2025, when it is projected to be 0.8% and 0.7% respectively. Mismatches in the labour market are also reflected in projected growth in compensation per employee, which additionally takes into account agreed public sector wage adjustments and an increase in the minimum wage in line with the inflation projection. Nominal growth in compensation per employee is projected to reach 4.3% in 2022, 6.4% in 2023, and 4.9% and 4.0% respectively in 2024 and 2025.

Inflation will persist above the target level

Despite the expected slowing of economic activity and measures to curb rising energy prices, price growth will remain well above the 2% inflation target in 2022 and 2023, primarily due to higher contributions from core inflation and growth in food prices. This is the result of increasing broadening of inflation, which derives from the intensified pass-through of high energy prices to other price groups, wage growth, persisting cost pressures in production chains and demand-side factors.

Based on these factors, a more significant easing of inflation is expected from the second half of 2023 on, in line with slowing growth in import prices and the effects of monetary policy measures. According to projections, inflation will be 9.3% in 2022 and 6.8% in 2023, and fall to 4.2% and 2.3% respectively in 2024 and 2025.

Publication Review of macroeconomic developments with projections, December 2022, is available here.