The decline in economic activity in the first quarter of this year represents a markedly worse starting point for this year’s GDP growth. The economy will strengthen again over the remainder of the projection horizon, driven by domestic factors and a gradual recovery in foreign demand. Economic growth will reach 1.3% this year, before rising to 2.4% over the next two years. After rising temporarily this year, inflation will stabilise around the 2% mark over the projection horizon. The core projection for economic growth is accompanied by significant downside risks, while the risks to the inflation projection are balanced.
Banka Slovenije has drawn up its latest economic projections. A major factor in this year’s economic growth forecast of 1.3% was the contraction of 0.8% seen in economic activity in the first quarter of this year, driven largely by the pronounced increase in uncertainty in global trade. Based on the expected improvement in the external environment and the favourable factors in the domestic environment, economic growth will strengthen again over the remainder of the projection horizon, to 2.4% in 2026 and 2027.
The strengthening growth will be relatively broadly based. A recovery in consumer confidence is expected to gradually bring growth in private consumption over the projection horizon more into line with growth in household disposable income, which will continue to be driven by relatively high wage growth and low unemployment. Under the assumption of a normalisation of the situation in global trade and the waning of uncertainty in the external environment, our expectation is that private-sector investment will also strengthen. The recovery in global demand and the strengthening activity in Slovenia’s main trading partners will see the contribution to GDP growth by net trade turn positive again by the end of the projection horizon.
Amid an uncertain economic situation, the waning of post-pandemic cyclical factors, and structural tightness on the labour market, employment will fall by 0.5% this year. This year’s fall in employment will be driven by reduced demand for labour in the private sector amid the worsened economic outlook. Employment growth will remain relatively limited in 2026 and 2027 at 0.2% and 0.5% respectively, as the cyclical effects that drove growth after the pandemic wane, and as the labour market remains tight.
Inflation will temporarily rise to 2.5% this year, before stabilising close to 2% later in the projection horizon (2.2% in 2026 and 1.9% in 2027). This year’s rise in inflation will be driven by food price inflation, the gradual pass-through of current and past growth in labour costs into final prices, base effects in year-on-year growth in prices of other goods, and institutional factors in electricity prices. The gradual slowdown in wage growth and the anticipated growth in productivity will see inflation fall in 2026 and 2027, particularly in its non-energy components.
The risks primarily relate to the uncertainty surrounding ongoing developments in trade policy.
The core projection is accompanied mainly by downside risks in respect of economic growth, while the risks to the inflation projection are balanced. The main risk is posed by the uncertainty surrounding the ongoing developments in trade policy. While the core projection assumes no change in tariffs from the projection date (21 May), the severe projection scenario envisages an additional rise in US tariffs, retaliatory measures, and the persistence of heightened uncertainty in the international environment. In the event of the realisation of this scenario, GDP growth would be 0.4 percentage points lower than under the core projection this year, 0.8 percentage points lower in 2026 and 0.2 percentage points lower in 2027, while the slowdown in economic activity would reduce inflation over the medium term. Adverse structural factors in the domestic environment, most notably lower productivity growth, could also lead to economic growth being lower than forecast. In this event the lower economic growth would be accompanied by higher inflation. Inflation might also be raised by supply shocks in connection with the capacity of supply chains, particularly in the event of the realisation of the more severe scenario, and extreme weather events, which have become increasingly frequent in recent years. Meanwhile an upside risk to economic growth, which would also strengthen inflation, might potentially be posed by government spending on defence and infrastructure projects at home and in EU partners.
Publication Review of Macroeconomic Developments and Projections undergoing translation.