Economic growth has been weak this year, largely as a result of the contraction in the first quarter, but it will strengthen again over the coming years. After rising temporarily this year, inflation will also gradually stabilise at the 2% central bank target rate. The labour market will remain tight, and therefore the economic projections are contingent on more evident productivity growth. The projections are accompanied by risks related to domestic structural challenges and the unstable international environment.
According to the economic projections released today, Slovenia is set to record relatively weak economic growth of around 1% this year, the lowest rate since 2020. The weakness is primarily attributable to the adverse economic developments in the early part of the year, driven by the uncertainties surrounding the trade policy of the new US administration. GDP growth strengthened over the remainder of the year, and according to the available data will remain solid in the final quarter at around 0.7%, with the most convincing evidence coming from the improved economic sentiment indicator. Growth will gradually strengthen over the horizon of 2026 to 2028. The recovery will largely be driven by the government sector in 2026, but growth will be more balanced and sustainable from 2027 onwards.
Employment growth will be weak over the projection horizon, which means that the projected increase in economic growth is heavily contingent on growth in labour productivity. Amid the difficulties in manufacturing and the export sector as a whole, employment will fall by 0.5% this year, before rising again over the following years. Unemployment will remain low, and together with employers’ positive outlook on future hiring and the adverse demographic trends, this suggests that labour market tightness will persist. This will limit employment growth over the projection horizon and will maintain the high growth in wages, which have also been notably affected by the public sector pay reforms as of this year. Nominal wage growth will average 5.4% over the projection horizon.
As relatively high growth in food prices and services prices persists, inflation will remain slightly above the 2% target rate over the majority of the projection horizon. Following its sharp fall in 2024, inflation has risen slightly again since May of this year, and will hit 2.5% at the end of the year. The main factor in this rise is a rise in food price inflation driven by higher prices of global food commodities, rising growth in labour costs and, to a lesser extent, the rise in VAT on sweet beverages. Food price inflation and, in particular, growth in labour costs have also driven persistently elevated service price inflation. These factors outweighed the negative contribution by energy prices, which was attributable to exchange rate movements, a fall in global oil prices, and cuts in network charges during the high season for electricity prices. Given the projected productivity growth, the expectation is that the gap with wage growth will gradually diminish, and with it the upward pressure on inflation from labour costs. The assumption is that import food prices will stabilise at the same time.
The risks relate to domestic and foreign factors
The projections are accompanied by risks in connection with domestic structural challenges and the unstable international environment. Their realisation would curtail economic growth, while the impact on inflation would be more unpredictable. As far as domestic factors are concerned, the projected increase in economic growth is heavily contingent on growth in labour productivity. This might be persistently low over the projection horizon owing to low growth in investment and its adverse structure in the past. Productivity growth might also be affected over the projection horizon by the narrowly-based economic growth seen in the past, which since 2023 has been heavily reliant on cyclical activity and government spending. On the inflation side, lower-than-expected productivity growth would maintain the upward pressure from high growth in unit labour costs. Conversely the realisation of risks on the economic growth side and weak demand could cause inflation to fall faster than projected. A further factor that might simultaneously reduce economic growth and inflation is China’s strengthened presence in European markets and the resulting escalation of price competition.
Publication Review of macroeconomic developments and projections undergoing translation.