This year and coming years see more moderate economic growth, inflation gradually easing

Following high economic activity in the past year, in the 2023–2025 period we anticipate more moderate economic growth at a rate of around 2 percent. Accompanied by further growth in employment, it will continue to be based on domestic spending, which will keep inflation at an elevated level, despite the reduction in external supply pressures. In the coming two years, however, inflation will in fact gradually decrease and approach the inflation target. With inflation the risks for the forecast playing out are mainly directed upwards, while in economic growth the risks are principally that it will be lower than the main forecast.

Banka Slovenije has completed its new forecast of economic trends. The forecast sees economic growth this year reaching 2.0%, and in the coming two years 2.2%.

In the forecast period economic activity will continue to be underpinned significantly by private consumption, which with continued growth in employment and the recovery of real incomes will remain at high levels. At the same time, for the coming year we anticipate a decline in investments and their limited growth in 2025, which will be the result of the anticipated decline in state investments on the expiry of the financial perspective and more stringent financing conditions. With the strengthening of global demand we expect to see a gradual increase in new orders, and along with it accelerated growth of merchandise exports in 2024 and 2025.

The favourable economic trends at the beginning of the year and expectations around hiring point to continued positive growth in employment. This year it will reach 0.8% and then ease back to 0.5% and 0.4%. Due to maintaining the high labour market tightness, growth in employment will be limited in the coming years. The tightness of the labour market, accompanied by high inflation, is also reflected in the forecast of nominal growth of compensation per employee, which for this year amounts to 9.6%, and in 2024 and 2025 will be 6.0% and 5.1% respectively.

The conditions of robust employment and high wage growth are bolstering inflation pressures originating in the domestic economic environment. Despite the dissipating effect of energy price growth, headline inflation this year will average 7.5%, and will for the most part reflect the core inflation trend, i.e. the growth of prices excluding energy and food. We anticipate a more visible easing of inflation starting in the second half of the year as a result of the effects of the high base, further stabilisation of supply factors and the gradual transition of monetary policy measures to aggregate demand. Nevertheless, inflation will stand at 3.6% in 2024 and 2.6% in 2025, thereby exceeding the two-percent inflation target.

The main macroeconomic forecast is accompanied by risks that are closely connected principally to the key factors of the inflation forecast. The slower dissipation of supply pressures and the intensifying growth in wages and maintaining of profit margins could lead to persistent long-term inflation. At the same time, bolstered domestic inflation factors could widen the divergence in inflation trends relative to the trading partners. On the real side of the economy this could be reflected in weaker growth through pressures on the competitiveness of the export sector and a stronger response of economic policies.

Review of macroeconomic developments and projections, June 2023