Economic growth slowed further last year to record its lowest rate since 2020, largely as a result of a contraction in the economy in the early part of the year. The growth was mostly based on private consumption and government spending, but continued to be held back in particular by weak foreign demand and the accompanying weakness of corporate investment. Banka Slovenije is expecting economic growth to strengthen this year.
The slowdown in economic growth last year was largely attributable to a decline in investment in the first half of the year. Amid weak growth in the main trading partners, low capacity utilisation, and increased uncertainty surrounding trade policy, growth in gross fixed capital formation averaged 4.1% over the year, and was mainly driven by government investment in the second half of the year. The uncertainty in the international environment also had an impact on households. This was reflected in developments in private consumption, which despite persisting at relatively high levels showed considerable volatility from quarter to quarter, and averaged growth of 1.7% over the year, significantly less than growth in real disposable income. In an environment of this kind the government sector made a major contribution to economic growth last year, through growth of 1.6% in government consumption, and the aforementioned uptick in the investment cycle in connection with the election cycle and the utilisation of EU funds. This was most evidently expressed in a strong recovery in construction activity in the second half of the year. By contrast, the difficult conditions in the export sector were reflected in an annual decline in value-added in manufacturing (of 1.3%). The structure of economic growth was also reflected in the labour market, where employment fell in the private sector, while strengthening in the government sector.
The data for the final quarter of last year shows current economic growth continuing, albeit at a slightly more modest rate in the backdrop of the persistent uncertainty in export-oriented sectors. GDP was up 0.4% on the previous quarter, taking the year-on-year growth rate to 2.0%. The current rate of growth in the domestic economy thus fractionally outpaced that in the euro area overall (0.3%). Growth at the end of the year was based on domestic demand. Household consumption was up 3.0% in year-on-year terms, which was most likely attributable in part to the payment of the mandatory Christmas bonus. Year-on-year growth in government consumption strengthened to 3.8%. Gross fixed capital formation also strengthened, and in the final quarter was up 12.0% on a year earlier. Year-on-year growth in exports stood at just 0.5% at the end of the year, significantly less than growth in imports, which continued to be driven by expanding activity on the domestic market. The negative contribution by net trade consequently strengthened slightly. Amid weak export demand, value-added in manufacturing declined by 2.6%.
According to Banka Slovenije’s latest projections, economic growth will strengthen to around 2% this year. Government activity will remain a significant factor in growth, both directly via investment supported by the utilisation of EU funds, and indirectly via increased expenditure on wages and stimulus for private consumption. As trade uncertainties wane, our expectation is that private investment will continue growing. Conversely export demand will continue to be outstripped by import demand, and the contribution to growth by net trade will therefore remain negative.