Macroeconomic Projections for Slovenia, December 2018
Highlights:
- The forecasts for economic growth in Slovenia remain favourable at 4.2% for this year, 3.4% for next year, 3.0% for 2020 and 2.9% for 2021.
- Economic growth will be broadly based, and underpinned both by domestic demand and by continued encouraging export activity.
- The favourable developments on the labour market will continue, and will be reflected in continuing, albeit more moderate, employment growth, and slightly higher wage growth.
- With the gradual strengthening of domestic inflationary pressures, inflation will temporarily exceed 2% over the medium term.
- The risks to economic growth are on the downside, and are primarily related to the uncertain situation in the external environment, while the risks to inflation are slightly on the upside, on account of potentially higher growth in labour costs and rises in oil prices.
The forecasts for economic growth in Slovenia remain favourable at 4.2% for this year, 3.4% for next year, and around 3% for 2020 and 2021.The more moderate growth in GDP in the future will be the result of a gradual shift into a more mature phase of the business cycle in both the Slovenian economy and the economies of major trading partners.
Economic growth in Slovenia will still be broadly based over the medium term, and underpinned both by domestic demand and by continued encouraging export activity. Growth in private consumption will remain under the influence of favourable developments on the labour market and slightly higher wage growth, which will not sharply outpace productivity growth and will thus not bring a notable deterioration in the external competitiveness of Slovenia’s export sector. Given the still relatively favourable growth anticipated in foreign demand, the export sector will continue increasing its market shares, and growth in total exports will remain solid over the entire projection horizon. Alongside the substantial internal resources, further growth in bank lending activity and the availability of favourable financing will allow the corporate investment cycle to continue. In addition to investment in machinery and equipment, growth in housing investment is also expected, which will be encouraged by the situation in the real estate market, where a shortage of housing is currently being reflected primarily in rapid growth in prices. Growth in final government consumption will be slightly higher this year, on account of faster growth in intermediate consumption and employment in the government sector, before becoming more moderate as the increase in the workforce in employment in the government sector slows. Government investment activity is expected to strengthen this year and next year, primarily on account of the electoral cycle and certain major investment projects. Faster growth in imports, which will primarily be attributable to domestic demand factors, will lead to a gradual reduction in the current account surplus. The surplus will narrow from 7.2% of GDP last year to 6.6% of GDP in 2021. A slight deterioration in the terms of trade will also be a factor in the narrowing.
Developments on the labour market are expected to remain favourable, and will be reflected in slightly higher wage growth, and in continuing, albeit more moderate, employment growth. The latter will again contribute to a reduction in the unemployment rate, which will approach its pre-crisis level towards the end of the projection horizon. Employers are expected to continue mitigating the domestic limiting factors connected with qualified labour shortages by recruiting foreign workers. That the limiting factors are more pronounced in sectors with below-average wages and lower productivity levels is an indication of the necessity of restructuring the Slovenian economy. Here the key role belongs to economic policy, which must provide for an attractive and predictable business environment for domestic and foreign investors, and for increased investment in research and development.
The inflation forecasts are in line with previous projections. Inflation as measured by the HICP will be slightly above the ECB monetary policy target over the medium term, and will increasingly be attributable to domestic factors. Headline inflation will reach 2% this year, and will primarily be attributable to external factors. As economic growth outpaces potential growth and wage growth increases slightly, domestic inflationary pressures will gradually strengthen over the projection horizon, which will lead to a rise in core inflation. The main expectation is for slightly higher growth in services prices and prices of goods other than energy and food.
The risks to the realisation of the economic growth forecasts for Slovenia are on the downside. They derive primarily from the external environment, and are related to the deterioration in the global geopolitical situation, and the escalation of protectionist measures, which could sharply reduce growth in foreign demand with adverse consequences for Slovenia’s exports, which remain a key pillar of economic activity. A sharp deterioration in the situation in the external environment would also be reflected in a decline in confidence on the part of consumers and firms, which would slow both investment activity and private consumption. By contrast, the risks from the domestic environment mostly remain on the upside. They are related to government investment activity, which in the wake of faster disbursement of EU funds and the intensified execution of major infrastructure projects and other investment projects could outperform its current growth projections.
Growth in private consumption could also be slightly higher, primarily as a result of faster wage growth, which could be encouraged by an even more pronounced shortage of qualified labour and/or a stronger pass-through of agreed wage rises in the public sector into wage growth in the private sector. The risks accompanying the inflation forecast are slightly on the upside, and primarily relate to developments in global oil prices and the potential for higher growth in labour costs.
