Macroeconomic projections: Domestic factors are main drivers of economic growth in this and the next year

Economic growth will stand at 2.6% this year, and 2.5% next year. It is also expected to remain at similar levels in 2021 and 2022. Domestic demand will be the main driver of economic growth, even as exports enjoy solid growth. Economic growth will continue to outpace average growth in the euro area, thereby continuing Slovenia’s catch-up with the most advanced economies. Structural imbalances will become increasingly evident on the labour market in the wake of shortages of qualified workers. Inflation will stand at around 2.0%. These are the key findings of the latest issue of the Bank of Slovenia’s Macroeconomic Projections for Slovenia. In it we also warn that risks remain pronounced, and if realised could have a significant impact on macroeconomic developments over the projection horizon.

Figure 1: Forecasts of contributions to GDP growth by components of expenditure in Slovenia and the euro area

Sources: SORS, Eurostat, ECB and Bank of Slovenia forecasts

Global economic growth will be significantly slower this year than in 2017 and 2018, and the recovery over the coming years will be more gradual than envisaged in previous forecasts by international institutions. This is reflected in lower assumptions for growth in foreign demand for both Slovenia and the euro area. Protectionist measures and geopolitical tensions are bringing economic uncertainty, which is reducing confidence in the economy, and most notably is leading to weaker investment and export activity on the part of firms.

The situation on the labour market will remain good, although structural imbalances are becoming increasingly evident amid the challenges presented by the aging population. In the low unemployment of recent times, these imbalances have been reflected in a shortage of qualified labour, but will also be reflected in more moderate employment growth over the projection horizon. Wage growth will remain relatively high, this year and next year primarily as a result of a rise in the minimum wage and last year’s agreement in the public sector.

Figure 2: Forecasts for compensation per employee and unemployment rate

Wage growth and the continuing favourable financing conditions will allow for growth in domestic demand and in imports of goods and services. As economic growth gradually picks up in the euro area and in other major trading partners, exports are also expected to enjoy solid growth. These developments in foreign trade will be reflected in a positive contribution to GDP growth by net exports, albeit significantly less than in recent years. The current account surplus will remain at levels close to 6% of GDP.

Inflation will stand at around 2%. Strengthening domestic price pressures are expected to bring a rise in core inflation. As labour costs increase, services prices in particular will rise, while greater exposure to competition means that prices in tradable sectors will rise slightly more slowly.

The risks surrounding the current economic growth forecasts remain mainly on the downside. In the international environment they relate primarily to the global trade situation. In the event of new protectionist measures and a deterioration in the geopolitical situation, growth could be even slower. Longer-term uncertainty could also begin to show up more in a decline in activity in the service sector, which is less dependent on foreign demand, and on the labour market. Geopolitical tensions in oil-producing countries could be reflected in higher growth in energy prices, and in slightly lower economic growth as a result of an increase in production costs.

Publication undergoing translation.