Following subdued economic growth last year, the recovery this year is being slowed by heightened geopolitical uncertainty and increased inflationary pressures. According to the latest projections by Banka Slovenije, economic growth is expected to reach 1.9 per cent this year, before rising to 2.2 per cent in both 2027 and 2028. The outlook this year remains uncertain, characterized by higher inflation, which is projected to average 3.6 per cent. With the anticipated easing of energy prices and domestic cost pressures, inflation is expected to gradually decline in 2027 and 2028. The baseline projection is subject to heightened risks related to the situation in the Middle East, domestic structural challenges, and the fiscal position.
After subdued economic growth last year, economic activity showed encouraging signs at the beginning of this year. However, uncertainty related to the situation in the Middle East is weighing on the short-term outlook. According to Banka Slovenije's projections, economic growth for this year and the following two years is expected to remain moderate.
Given the unstable conditions in the international environment, economic growth this year will be driven by domestic consumption. Despite rising inflationary pressures, growth will continue to be supported by a still robust labour market and further increases in real disposable household income. As international conditions stabilise, economic growth is expected to gradually strengthen and become more balanced in the coming years. However, a stronger recovery will remain constrained by unfavourable terms of trade and rising labour costs.
In an environment of economic uncertainty and structural labour shortages, employment growth is expected to remain modest over the projection horizon. Total employment is expected to increase by 0.4 per cent this year and by 0.2 per cent in both 2027 and 2028. Growth will be driven almost exclusively by employment in the government sector. The unemployment rate will remain low in the coming years, averaging 3.9 per cent, which will continue to reflect tight labour market conditions. This will also be reflected in persistently strong wage growth, which is expected to reach 7.2 per cent this year and gradually moderate to 4.8 per cent and 4.4 per cent in the following two years. Over the entire projection horizon, wage growth will outpace productivity growth, further increasing unit labour costs.
Rising labour costs, together with higher energy prices, will contribute to a renewed acceleration of inflation in Slovenia. Developments in the Middle East have already been reflected in price movements in April and May, when inflation increased by more than one percentage point compared with the first part of the year. Higher prices of energy and intermediate goods in international supply chains will keep inflation elevated in the remainder of the year. This will be further amplified by domestic factors, including strong growth in labour costs, construction activity stimulated by government investment, and still robust private consumption. With the expected easing of both energy prices and domestic cost pressures, inflation is projected to gradually decline in 2027 and 2028.
Risks Associated with Geopolitical Uncertainties and the Fiscal Position
The projections are accompanied by heightened risks, with those to growth tilted to the downside and those to inflation to the upside. Prolonged military tensions in the Middle East, beyond what is assumed in the baseline projection, could, through higher energy and commodity prices, disruptions in supply chains, weaker global demand, increased uncertainty and financial stress, result in lower investment and further deterioration in conditions in the export sector. At the same time, supply-side shocks could trigger inflationary pressures, which would be further amplified domestically by wage growth outpacing productivity.
Fiscal risks are also becoming increasingly important, as the government deficit is expected to approach the reference value of 3 per cent this year and to exceed it in the remainder of the projection horizon. This could halt the reduction in the debt-to-GDP ratio and further diminish the fiscal space available to respond to potential shocks in an environment of heightened geopolitical risks.
