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Following the outbreak of war in Ukraine, survey indicators for the euro area point to a further slowdown in economic growth, and international institutions’ forecasts for this year were revised significantly downward. March values of survey-based indicators for the euro area fell sharply after the start of the Russian military aggression, and the Economic Sentiment Indicator (ESI) recorded the sharpest decline in March since the outbreak of the epidemic. After last year’s high economic growth of 5.3%, international institutions expect a sharper slowdown in growth in the euro area and among Slovenia’s main trading partners this year than was expected in the autumn and at the beginning of the year, given the tense geopolitical situation and high uncertainty. Before the outbreak of war, growth in the euro area was expected to reach 4% this year and slow to 2.5% in 2023. According to the March Consensus average forecasts, growth will reach 3.2% this year and slow to 2.3% next year. 

Amid heightened uncertainty, business expectations in Slovenia, which began to weaken at the beginning of the year, point to a further slowdown in the export part of the economy; activity in the rest of the economy was relatively more favourable at the beginning of the year. Slovenia’s export share in the EU market already declined further year-on-year in the last quarter of last year, especially in the automotive industry. Trade in goods and manufacturing output were down in current terms in the first two months of the year amid ongoing supply chain disruptions. Following Russia’s military aggression against Ukraine, sentiment in the export-oriented part of the economy deteriorated further in view of significantly lower export expectations. In March, confidence also fell sharply among consumers, while it remained high in trade and services and in construction. Activity in sectors that are more dependent on domestic demand remained favourable at the beginning of the year. With the lifting of the recovered/vaccinated/tested rule, along with expected further price increases and the fear of a possible shortage of some goods due to the crisis in Ukraine, activity in the first quarter was higher in trade and in most other services, according to data on the fiscal verification of invoices. After a gradual decline in 2021, activity in construction also increased in January.
 

Conditions in the labour market continue to be very favourable and labour shortages have put upward pressure on wage growth in some activities. The number of persons employed increased year-on-year in January, with the largest increases in accommodation and food service activities and construction. Given the shortage of domestic labour, which was most pronounced in construction, the contribution of foreign labour to overall employment growth in January was 50%. Registered unemployment was extremely low. According to original data, 60,534 people were unemployed at the end of March, 6.6% fewer than at the end of February and 26.7% fewer than a year earlier. The number of long-term unemployed also declined further. Average nominal gross wages were down slightly year-on-year in January, as public sector wage growth slowed significantly due to the cessation of epidemic-related allowance payments. Year-on-year growth in the private sector was somewhat more modest than in previous months, partly due to a relatively high base in January last year (given a sharp increase in the minimum wage and the impact of the methodology used to calculate average wages). 

Year-on-year growth in consumer prices slowed to 5.4% in March, reflecting a temporary fall in electricity prices. The contribution of energy to headline inflation has thus declined, but the high commodity prices are increasingly contributing to the rise in prices of other goods. Food prices rose by almost 7% year-on-year in March, the highest increase since 2008. The war in Ukraine has also increased the risk of further food price increases, as prices of fertilizers and some primary agricultural commodities have soared on international markets. High prices of energy and other commodities, along with increasing problems in the supply chain, are also affecting Slovenian industrial producer prices, which increased by 16.5% year-on-year in February.

The general government deficit and debt declined slightly last year in the face of strong economic growth, and the general government indicators continued to improve at the beginning of the year. Last year, the deficit was 5.2% of GDP (2.6 p.p. of GDP lower than in 2020) and public debt was 74.7% of GDP (5.1 p.p. of GDP lower than in 2020). The main reasons for this improvement were the strong economic recovery and cuts in expenditure to mitigate the impact of the epidemic, which we estimate fell from 5.2% of GDP in 2020 to 4.5% of GDP, and the share of debt also fell due to the decline in the country’s cash reserves. The surplus of the consolidated balance of public finances totalled EUR 117.5 million in the first two months of 2022 (there was a deficit in the same period last year of EUR 632 million). Revenue growth arose mainly from higher VAT receipts, while receipts from the EU budget also saw a sharp increase, mainly due to the inflow of funds from the Recovery and Resilience Facility and from structural funds, as funding under the 2014–2020 Financial Perspectives is coming to an end. Expenditure decreased in the first two months, reflecting lower payments related to measures to mitigate the consequences of the epidemic (funds for wages, transfers to households and subsidies).