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In the Autumn Forecast, which was prepared at the beginning of September in the context of a significantly changed level and composition of GDP compared to the spring forecast, we assume real GDP growth of 1.6% this year, which is slightly lower than what we had forecast in the spring (1.8%). In nominal terms, the forecast is heavily influenced by the revised base following the release of the first annual GDP estimate for 2022 by SURS, which lowered the initial estimate of nominal GDP based on quarterly data by almost EUR 2 billion. “Real movements are particularly affected by the slowdown in the economies of Slovenia’s main trading partners, which is stronger than expected in the spring, especially in Germany, weighing on export growth”, commented Maja Bednaš, Director of IMAD, on the latest forecast. At the same time, the forecast is also affected by changes in the real growth of some aggregates in the release of the first annual estimate for last year, notably private consumption, and value added in manufacturing and construction. In general, it appears that, in contrast to previous estimates, the post-COVID-19 recovery was more concentrated in 2021 and economic growth last year was below the EU average. There have also been some changes in the indicators of the household saving rate, which is now much higher, and productivity, especially in manufacturing, which has declined. “This also substantially changes the base for the preparation of the forecast, as it suggests that the impact of the drop in purchasing power was greater and that households were even more cautious in their spending than originally assumed, and that cost pressures had a greater impact on activity in the predominantly export-oriented part of the economy”, Maja Bednaš explained.

Growth in exports of goods and services will lag slightly behind that of foreign demand this year. Construction investment is expected to slow down but remain high, and elimination of the consequences of the August floods will have a favourable impact on construction activity. We estimate that the direct negative impact of the floods on manufacturing and transportation activity and on exports will be temporary and, although significant at local levels, will not have a major effect at the macroeconomic level. Investment in equipment and machinery will be lower this year than last, given the weakening of activity in the international environment and higher interest rates. Private consumption growth will be lower than last year, however, we expect a moderate growth in the second half of the year (after an estimated decline in the second quarter). This will be driven by high employment, further moderate real wage growth and government measures to mitigate rising energy costs and eliminate the consequences of natural disasters and to a smaller extent also by the replacement of durable and semi-durable goods damaged in the August floods. Turnover in trade will be lower this year than last. Although slowing, growth in the consumption of services, especially related to tourism, will continue. Government consumption will be higher than last year, in the second half of the year due to higher expenditure on goods and services in connection with the elimination of the consequences of floods. 

In the coming years, GDP growth is expected to return to slightly higher levels – 2.8% in 2024 and 2.5% in 2025. With a gradual strengthening of external demand growth, we expect a renewed growth in exports, a strengthening of growth in value added in manufacturing and continued growth in trade in services. For the next year, we forecast further growth in investment, boosted by the recovery and reconstruction after this year’s floods and a renewed growth in business investment in machinery and equipment. Investment growth is higher than expected in the spring forecast due to additional investment related to flood recovery and reconstruction. However, the construction sector is subject to a number of uncertainties given the relatively high capacity utilisation. In particular, the additional demand associated with the elimination of the consequences of the floods could drive up prices in the construction sector and crowd out other investments. Investment growth is expected to slow in 2025. Amid stronger real income growth, private consumption growth will be higher in 2024 and 2025. This will be driven by continued employment and wage growth and slowdown in inflation, which will boost the consumption of non-essential goods and services. We assume that the propensity to save will remain higher in 2024 and 2025 than before the epidemic. Higher growth in government consumption over the next two years will be driven partly by continued growth in health expenditure and the gradual implementation of the long-term care system.

Continued moderation of growth in employment and decline in unemployment is expected until the end of this year, although the tight situation due to labour shortages will be eased slightly by certain measures to facilitate the recruitment of foreign labour. The demographic trends, i.e. a marked decline of the population aged 20–64 since 2012, will become an even greater obstacle to the growth of value added. Average nominal gross wage growth will be high this year but subdued in real terms given the still-high inflation. The acceleration of growth in the private sector compared to last year will be influenced by continued pressures in the labour market in the face of labour shortages, increased efforts to maintain the purchasing power in the context of elevated inflation, and the January increase in the minimum wage. In the public sector, wage growth will be mainly influenced by the implementation of last year’s agreement with public sector unions. Nominal wage growth will weaken somewhat over the next two years as price pressures ease. Real growth will gradually pick up as inflation moderates and labour market pressures persist in the face of unfavourable demographic trends. The forecast for gross wage growth is subject to significant risks related to labour market pressures and the announced reform of the public sector wage system, however, the dynamics of its implementation and the assessment of its impact on wage growth are difficult to assess at this stage.

We expect inflation to weaken further over the rest of the year, but less markedly than in recent months. We expect services price growth to start moderating towards the end of this year, but still to remain relatively high and to make a significant contribution to inflation throughout the forecast horizon. The contribution of food prices will also remain relatively high this year, but growth of food prices is declining after reaching high levels at the beginning of the year. In the absence of shocks, the contribution of energy prices is expected to be moderate over the entire forecast horizon (although year-on-year fluctuations are to be expected due to the base effect related to past government measures), and the gradual slowdown in non-energy industrial goods price growth is also expected to continue. As price growth gradually weakens, inflation at the end of this year is expected to be 5.4% and average 7.6% in 2023 a whole, mainly due to the high levels at the beginning of the year. For 2024–2025, we expect inflation to weaken further in the absence of external shocks and, supported by monetary policy measures, to fall to slightly above 3% by the end of 2024 and close to 2% by the end of 2025.

Uncertainties surrounding the Autumn Forecast are related to the international economic environment, where activity is weakening, the broader economic impact of the recent floods in Slovenia, the pace of inflation moderation and the impact of deteriorating cost competitiveness on the export-oriented part of the economy. Economic growth in Slovenia and its trading partners is weakening this year, especially in the export-oriented part of the economy. This is related to the slowdown in global growth, which could be even weaker than currently expected. In addition to weaker demand, the export-oriented part of Slovenian economy is also facing a deterioration in cost competitiveness, which could have a greater impact on export activity than expected in the forecast. Uncertainties and risks to economic growth in the euro area are also related to the possible persistence of inflation, which could further constrain household purchasing power and lead to a stronger tightening of monetary policy, with negative effects on lending and investment activity. In this context, upside risks to inflation arise from a number of factors, including higher energy prices, potentially higher services inflation and faster-than-expected increases in food prices, which could be more volatile given more frequent extreme weather events. It was difficult to accurately predict the broader economic impact of the recent natural disaster due to the uniqueness of the event and the incomplete damage assessment, incomplete reconstruction plans and non-final government measures. “Recovery and reconstruction will have a favourable effect on construction activity but at the same time this sector already faces high capacity utilisation. To a certain extent, this could lead to the crowding out of other investments, while increasing the risk that additional demand for construction work could push up construction prices, and higher demand for workers, in the face of an already acute labour shortage, could lead to faster wage increases and consequently slower decrease in inflation," explained Maja Bednaš, Director of IMAD. There are also some upside risks to the economic growth. “These arise in particular from successful efforts to attract labour and efficient absorption of EU funds,” she added.