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“Economic growth will slow significantly in 2009, and the recovery in 2010 will be slower than forecast in the autumn,” said the representatives of the Institute of Macroeconomic Analysis and Development at today’s presentation of the Revised Autumn Report of Economic Trends. As a result of significantly decreased economic activity, employment is expected to decline in 2009 and the number of unemployed will increase. A slight improvement in the labour market can only be expected in 2010. Due to significantly lower prices of commodities and slower economic growth, inflation in 2009 will be much lower than forecast in the autumn, but is projected to stabilise around the long-term equilibrium level in 2010.

“The situation in the international economic environment and the expectations regarding future trends have deteriorated notably since the time of the preparation of the Autumn Report,” said Boštjan Vasle, Director of IMAD, explaining the reasons for revising the autumn forecast, and continued that “the most recent available data on domestic activity and particularly the indicators of expected trends also point to a rapid and pronounced transfer of changes in the international environment to the Slovenian economy as a result of lower demand and a substantial tightening of financing conditions.”

The forecasts of global economic growth by the main international institutions were revised downward significantly in the last two months. In most of our main trading partners, GDP is expected to drop in real terms in 2009. “This is a significant worsening compared with the assumptions from our autumn forecast, where 1% average economic growth was projected for the euro area,” explained Mr. Vasle. The price of oil in the next two years was another assumption which was considerably revised. In the revised forecast, the assumed price of oil is USD 50 per barrel, which reflects the decline in oil prices and is USD 70 lower than the autumn forecast.

The tightening conditions in the international environment have already contributed to a somewhat faster slowdown of economic growth than projected in the autumn. Economic growth in 2008 will thus be lower (4.1%) than expected by IMAD in September (4.8%). In 2009, the impact of the deteriorated situation in the international environment will be even more pronounced. Economic growth will thus slow considerably, largely as a result of significantly weaker exports and investment activity, and will total 1.1%. “As a result of the anticipated recession in Slovenia’s main trading partners and the significant decline in foreign demand, the slowdown in export growth in 2009 will be much more pronounced than predicted in the autumn,” explains Vasle.

Investment activity will also decline in 2009, mainly due to a tightening of lending conditions and a deteriorated business climate. The volume of investment will drop by 2% in the next year (autumn forecast: 1.3% growth). IMAD projects the most notable decline with regard to construction investment and investment in machinery and equipment. In contrast, private consumption will increase also in 2009 (2.8%), albeit at a slower pace than this year (3.4%). Under the assumption that conditions in the international environment will stabilise and that global economic growth will begin to recover in the second half of 2009, economic growth in Slovenia might strengthen to 3.1% in 2010.

With notably slower economic activity, employment is expected to decline by 1.3% in 2009. A more notable slowdown is expected particularly in manufacturing and construction, but also in some service sectors.  Due to the larger number of unemployed, forecasts of unemployment rates for 2009 are higher as well: a registered unemployment rate of 7.7% (compared with 6.8% in the autumn) and a survey unemployment rate of 5.2% (compared with 4.8% in the autumn). A slight improvement in the labour market situation can only be expected in 2010.

With a continued slowing of economic activity, a worse labour market situation, and a lower inflation forecast, growth in the total gross wage per employee will be a nominal 2.8 p.p. weaker and a real 0.2 p.p. stronger in 2009 than the autumn forecast. Wage moderation in the private sector will be more pronounced, as the private sector adapts to a greater extent to changes in the economic environment. The predicted growth of wages in the public sector takes into account the negotiations on the implementation of the new wage system. Among the assumptions regarding wage dynamics in the public sector, only the inflation forecast has been revised downwards.

At the end of 2008 inflation was much lower (2.2%) than predicted by IMAD in the autumn (5.3%), largely as a result of lower oil prices in global markets. At the end of 2009, y-o-y inflation will stand at 3.0%, while average inflation will decline to just 1.1% (in 2010: 3.0%), partly also on account of the price dynamics in 2008. “A strong swing below the equilibrium level, similar to this year’s upswing above the equilibrium level, will not be the result of economic policy measures, but will be due to external shocks – this time a drop in oil prices in the global market,” IMAD also pointed out.