Moderate growth in economic activity over the years ahead; inflation to gradually ease

After the strong post-pandemic recovery of recent years, the significant decline in international trade and cooling domestic demand are driving a slowdown in this year’s GDP growth in Slovenia to 1.3%. Economic growth will stabilise at over 2% in the next few years. Inflation will gradually ease over the projection horizon, but will remain above the monetary policy target level, and will continue to exceed the euro area average, despite closing the gap. The tight labour market will see employment growth slow, while wage growth will remain high, outpacing growth in productivity.

Banka Slovenije has drawn up its new economic projections, which are forecasting economic growth to stand at 1.3% this year, before stabilising at over 2% over the next three years amid increases in real household income and foreign demand (2024: 2.2%; 2025: 2.3%; 2026: 2.5%). It will remain below its long-term potential, in the context of low growth in investment and a tight labour market.

A major factor in the strengthening economic growth over the projection horizon is an increase in private consumption, which amid high employment and slowing inflation will be based on real growth in disposable income and an improvement in consumer confidence. Foreign demand will also strengthen gradually. As the effects of the post-pandemic reopening of the economy wane, growth in foreign trade will be attributable to the restoration of the pre-pandemic balance between trade in goods and services, and a further improvement in supply-side factors. In contrast to final consumption and foreign trade, growth in investment during the projection horizon will be lower than its current rate, but despite the impact of the earlier rises in interest rates and the changeover to the EU’s new multiannual financial framework it will remain high, thanks in part to the investment in business recovery following the floods.

The persistent tightness of the labour market and the slowing economic growth will reduce employment growth, but wage growth will remain high. Employment growth will stand at 1.2% this year, before stabilising at 0.5% over the period of 2024 to 2026. Nominal wage growth will reach 11.5% this year, and despite gradually slowing will still average more than 5% over the remainder of the projection horizon.

The slowdown in inflation in Slovenia over the projection horizon will only be gradual, in line with the rise in labour costs. Average real wage growth between 2024 and 2026 will outpace average productivity growth, which will keep inflation at elevated levels, service price inflation in particular. The expectation is for inflation to remain above its 2% target level over the entire projection horizon, and above the euro area average. Inflation is forecast to average 7.2% this year, 3.0% next year, 3.1% in 2025 and 2.1% in 2026.

The forecasts are accompanied by uncertainties, which with regard to inflation are still slightly on the upside. Because wage growth in Slovenia is one of the highest rates in the euro area, productivity growth that is weaker than predicted could lead to a sharper pass-through into final prices. This would be reflected in cost pressures on production, and a loss in the export competitiveness of the economy. From a demand perspective, additional risks of higher inflation and also higher economic growth come from the still-substantial level of household savings, which amid any improvement in confidence could be released via an increase in consumption and in housing investment.

Publication Review of macroeconomic developments and projections, December 2023 is available here.