Economic activity in Slovenia continued to strengthen in the first quarter, in quarterly and year-on-year terms alike. This growth was supported mainly by domestic consumption and investment, while the trade deficit persisted. The data for the first quarter does not yet reflect the direct impact of the deteriorating geopolitical situation in the Middle East, but the increased uncertainty and higher inflation expectations have worsened the outlook for the remainder of the year.
Economic activity in the first quarter was up 0.7% on the final quarter of last year, and up 3.0% in year-on-year terms from the low base seen a year ago. This growth significantly outperformed the average for the euro area, where flash estimates put quarterly GDP growth at 0.1% and year-on-year growth at 0.8%.
Domestic final consumption was driven by private consumption and government consumption in the year-on-year comparisons. Household consumption increased by 2.7%, amid the resumption of real growth in wages, and the continuation of low unemployment and relatively favourable consumer confidence. Government consumption was also up in year-on-year terms, supported by a rise in employment in the government sector, and higher spending on healthcare and long-term social care. Growth in gross fixed capital formation strengthened slightly to hit 12.6%, driven by further rises in investment in machinery and equipment, and by government projects supported in part by EU funding. Amid the increased geopolitical uncertainty following the outbreak of the war in the Middle East, and subdued foreign demand, growth in exports remained modest at 0.7% as a result of a decline in services exports, while merchandise exports increased by almost 2%. Imports strengthened by 1.5% amid robust domestic consumption, which meant that net trade acted as a brake on economic growth in the amount of 0.5 percentage points. The contribution made by changes in inventories was also negative (in the amount of 1.4 percentage points). In terms of economic sector, the growth in domestic consumption was driven by services, while investment activity was driven by construction. After falling last year, value-added in manufacturing increased in the early part of the year, which coincided with an improvement in the situation in European industry and a year-on-year increase in merchandise exports.
Despite the favourable economic growth seen in the first quarter, the growth outlook, which Banka Slovenije will examine in June as part of its latest macroeconomic projections, has worsened on account of geopolitical uncertainties, higher energy prices, a less-favourable international environment, and worsening developments in the public finances.