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Sonja Primožič

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Autumn Forecast: Broad-based economic growth expected to continue this year and next

The Autumn Forecast predicts 4.4% GDP growth for this year; in the next two years the broad-based economic growth will continue, hovering between 3% and 4%. The forecast is based on assumptions of stable economic conditions at home and internationally and favourable expectations. The key drivers of this year’s faster growth are the high growth of exports and the dynamics of government investment; this is expected to increase this year after dropping substantially in 2016. In the next few years economic growth will be increasingly affected by demographic factors, which will show particularly in lower growth in employment and, consequently, in disposable income and private consumption.

 

The accelerated export growth is driven not only by stronger growth in foreign demand but also by the improvement of export performance, which has been especially pronounced this year. This year growth in foreign demand strengthened in most of Slovenia’s main trading partners. Export performance, which has otherwise been rising ever since 2011, has thus improved significantly this year. Export growth will also remain high in the next two years, when we expect similar growth in foreign demand and a further improvement in export performance.

Domestic demand will remain a significant factor of growth in 2017–2019. Household consumption will continue to be boosted by growth in disposable income amid favourable conditions on the labour market, which has a favourable impact on consumer confidence. In the next two years, growth in private consumption will otherwise be gradually slowing, primarily owing to the expected lower growth in employment. Investment is expected to increase further. The rising demand and favourable conditions for investment (high profits and low interest rates) will support growth in investment in machinery and equipment; amid the rebound in the property market, we also expect growth in housing investment. After last year’s significant decline related to the transition to the new EU financial perspective, general government investment will stop falling this year, which will be reflected in a considerable acceleration of total investment growth in 2017. The otherwise modest growth of government consumption will also continue in all three years.

The level of employment will be high, but employment growth will be increasingly affected by demographic change. Rising in practically all sectors, employment will be up significantly this year (2.7%). A continuation of favourable movements is also suggested by the indicators of expected employment, which remain at the highest levels since the onset of the crisis. Unemployment will consequently drop further, to below 90,000 persons for the year as a whole. Over the coming years employment growth will be increasingly affected by demographic factors, i.e. the expected contraction of the working-age population.

In 2017–2019 wage growth will remain moderate and will not exceed productivity growth. In the private sector, the nominal growth in the average gross wage will arise from higher GDP growth and a further fall in unemployment. The latter is also related to companies’ difficulties in finding skilled workers, which will put upward pressure on wage growth. Wage growth is nevertheless expected to remain in line with productivity growth, as wage formation in the private sector (the tradable sector in particular) will continue to reflect companies’ efforts to maintain competitiveness. In the general government, wage growth will remain high this year and next, given the wage agreements between the social partners.

Inflation will hover around 2% in the next few years. After a period of low price growth/deflation, the growth of domestic and foreign demand will boost the growth of service prices in particular, while – in the absence of commodity shocks from abroad – price rises in energy and non-energy goods will remain moderate.

The current account surplus will remain high in 2017–2019 (at around 5% of GDP). The main reasons for the high surplus in the next few years are the process of private sector deleveraging, which has been underway for several years, and the still low level of domestic consumption, particularly investment; in the period of rising foreign demand, the surplus was also attributable to the improvement in export competitiveness of the tradable sector. The slight narrowing of the surplus this year is largely related to a deterioration in terms of trade amid higher prices of oil and commodities than last year and, in part, to a larger deficit in primary and secondary income. In trade in services, the surplus will continue to widen in the forecasting period, particularly in transport and travel services.

At the time of preparation of the Autumn Forecast, the risks to the baseline scenario associated with the international environment are mainly on the upside. A further improvement in confidence in the EU gives additional impetus to the cyclical upswing of economic growth in the EU. This could, consequently, be even higher than assumed. The uncertainty in the domestic environment is mainly related to the dynamics of private investment, which, with increased bank lending, could be even higher than projected in the baseline scenario. On the other hand, government investment could be lower than in the baseline scenario, particularly if the absorption of EU funds were to be lower than planned. The uncertainty surrounding the dynamics of final consumption is related to favourable labour market developments, which could translate into higher growth in household disposable income and, in turn, private consumption. Over the longer term, the highest uncertainty is related to the way of dealing with demographic change, one of the key factors that will affect the dynamics of economic growth and population welfare in the future.