Economic growth to remain high next year, while inflation will gradually ease
Banka Slovenije has today released its new economic projections. The key finding is that the high economic growth seen this year (6.7%) will continue next year (4.0%). Economic activity will remain broadly based, driven by domestic demand and corporate exports. Consumer price inflation will remain elevated toward the end of this year and in the early part of next year, but is then expected to gradually ease over the course of the year (it is forecast to average 3.8% over 2022). We should reiterate that the projections are accompanied by pronounced risks in connection with the potential renewed deterioration of the epidemiological situation, imbalances on the labour market and on the commodities market, most notably the energy market, and conditions in supply chains.
Our latest projection suggests that economic growth will stand at 6.7% this year, 4.0% next year, 3.3% in 2023 and 2.6% in 2024. The Eurosystem projections for the euro area also remain encouraging.
Figure 1: Economic growth forecasts for Slovenia and the euro area, 2021 to 2024
Sources: SORS, Eurostat, Eurosystem and Banka Slovenije projections
Economic activity in Slovenia will remain broadly based over the projection horizon, supported by domestic demand and also by corporate export activity. Growth will be driven by household consumption, and investment by firms and the government, which will also be supported by EU funding under the recovery and resilience facility.
Exports will remain a significant driver of economic activity in Slovenia. Several factors will support the recovery in international trade in goods and services. We expect the imbalances to narrow between supply and the increased demand, which is largely attributable to increased saving in the months following the outbreak of the pandemic, and reduced access to certain goods and services. The situation on global commodity markets is also expected to gradually ease next year, and the challenges in supply and production chains will be less pronounced.
Private consumption will be fuelled by the buoyant labour market, while household purchasing power also remains encouraging, thanks in part to the supportive stance of economic policy. The job preservation measures have helped employment to quickly recover and to surpass its pre-crisis level even this year, and the outlook is also encouraging. In 2022 the unemployment rate will fall below its record low from 2008. Firms will continue to face labour shortages, which they will largely overcome by hiring foreign workers, given the adverse demographic trends.
Wage pressures are strengthening in this situation, and will be a key factor in wage developments over the projection horizon amid the anticipated rise in the minimum wage. One-off factors in connection with the ending of most epidemic-related wage bonuses will slightly reduce wages in the public sector next year, but wage growth in the private sector is forecast at 4.4% amid record buoyancy on the labour market and elevated inflation. Aggregate wage growth will average 3.7% over the remainder of the projection horizon.
Gradual easing of inflation
Consumer price inflation will average 3.8% next year. Our expectation is that from its elevated levels at the beginning of the year inflation will gradually ease over the following months. Inflationary pressures have strengthened over recent months, driven in particular by imbalances on the energy markets (energy price inflation has accounted for two-thirds of consumer price inflation this year) and issues in global supply and production chains, which are expected to be mostly temporary in nature. Service price inflation is also strengthening. The aforementioned factors have in recent months brought an increase in the share of products and services seeing elevated inflation. In the wake of the anticipated normalisation of the situation next year, and under the assumption that price growth will not pass through even more markedly into higher wage growth, our expectation is that inflation will slow in 2023 and 2024 to converge on our inflation target.
Figure 2: Inflation forecasts for Slovenia and the euro area, 2021 to 2024
Sources: SORS, Eurostat, Eurosystem and Banka Slovenije projections
Alternative scenarios and risks
The projections are accompanied by three alternative scenarios of economic developments. While the core projection envisages the successful control of the epidemic without the introduction of more stringent containment measures, two of the alternative scenarios assume a sharper deterioration in the health situation and the reimposition of containment measures, which will slow economic growth (the forecast for 2022 is 2.9% under the less adverse scenario, and 1.6% under the severe scenario), while the effects would be most pronounced in services that are most dependent on personal contact. Conversely, faster adaptation to the new situation by businesses and households and increased confidence in the economy would be reflected in slightly higher economic growth next year (5.1%).
The projection is accompanied by other risks and uncertainties. The persistence of the imbalances in supply chains might continue curtailing economic growth and could further strengthen rises in prices of goods and services, which could have an adverse impact on household purchasing power and corporate investment potential. Amid labour shortages, wage pressures could rise even more significantly, which could lead to a wage-inflation spiral, when firms would pass rising labour costs through into final prices.
Publiation Macroeconomic Projections for Slovenia, December 2021, is available on the link.