New macroeconomic projections for Slovenia
At today’s meeting the Governing Board of the Bank of Slovenia discussed and approved the December 2017 Macroeconomic Projections for Slovenia*.
The macroeconomic situation in Slovenia is favourable. Economic growth has been strengthening for four years now, and the situation on the labour market is consequently improving. The positive cyclical developments and the low level of interest rates are also having a favourable impact on the state of public finances, while inflation remains moderate. The macroeconomic projections on this occasion are therefore even more optimistic, albeit subject to certain risks.
Economic growth is expected to remain high over the projection horizon, averaging 4%. Growth is forecast to be highest this year, at 4.7%, and to gradually slow to 3.4% by 2020. The high economic growth is expected to be sustained by its broad basis, supported by domestic demand and a strong export sector. Growth in private consumption is forecast to remain robust, at around 3%, and is being promoted by rising disposable income and diminishing uncertainty. Alongside private consumption, private-sector investment and public investment are also forecast to strengthen. Domestic and foreign investors have numerous investment projects awaiting go-ahead, having been encouraged by the reduced uncertainty in the business environment, the increased optimism in the export sector, the strengthening of private consumption and favourable financing conditions. Growth in investment is forecast to exceed 8% over the coming years, with financing partly coming from bank loans in addition to firms’ own resources.
The competitive export sector and favourable economic situation in the international environment are expected to allow high export growth over the medium term. Export growth is also expected to be supported by new investment in machinery and equipment, and new production lines with higher value-added. This will raise the productivity of the export sector, which will maintain competitiveness on expanding global markets, and will allow the growth in foreign demand to be exploited. Export growth is forecast to average more than 6% over the projection horizon. The contribution made to GDP growth by net trade will nevertheless be smaller than in previous years, as increased domestic demand will strengthen import growth. The merchandise trade surplus will thus decline, which will slightly reduce the current account surplus, although it will remain at a sufficient level to mitigate any sharper deterioration in the terms of trade caused by price shocks on the global commodities market.
The economic recovery is also improving the situation on the labour market. After increasing this year, employment growth is forecast to gradually slow, but is nevertheless expected to average more than 1%. The aging population and a shortage of qualified workers are seen as the largest limiting factors for faster employment growth in the future. At the same time the surveyed unemployment rate is forecast to continue falling, and should reach around 5% by the end of the projection horizon, further slowing employment growth in later years. Hiring will be faster in export-oriented sectors, construction and services. A gradual fall in the unemployment rate below the natural unemployment rate and structural imbalances on the labour market will begin to put upward pressure on wages, growth in which will strengthen throughout the projection horizon. Because wage growth will outstrip growth in productivity, growth in unit labour costs will also start to increase.
Growth in domestic demand aggregates and cost pressures are forecast to raise inflation to above 2% by the end of the projection horizon. Core inflation will gradually rise to around 2.5% by the end of the projection horizon. Higher inflation will primarily be evidenced in services, while growth in prices of other tradable goods will be lower and more limited. After recording strong growth this year, energy and food prices are forecast to play a less evident role in headline inflation in the coming years.
On this occasion the majority of risks to the GDP growth and inflation forecasts are again on the upside. The largest risks to economic growth continue to come from the domestic environment, and are related to growth in private-sector investment and government investment. Particularly in the case of government investment, where major investment projects are involved, the effects on growth could be considerable. Employment growth and the reduction in general uncertainty are strengthening private consumption, which given favourable financing conditions could even be significantly higher, particularly in light of the potential for faster wage growth. Faster wage growth and potential shocks in global commodity prices could cause inflation to be higher than predicted in the current forecasts.
*In translation. Previous projections: Macroeconomic projection for Slovenia