Summary

The contraction in economic activity observed in the first quarter of this year constitutes a significantly weaker starting point for annual GDP growth. It is projected to reach 1.3% in 2025, before gaining momentum and increasing to 2.4% in both 2026 and 2027. In parallel, the disinflationary trend is expected to pause temporarily in 2025, with headline inflation forecast to rise to 2.5%. Thereafter, inflation is projected to gradually converge towards the medium-term target, reaching 2.2% in 2026 and 1.9% in 2027.

The Slovenian economy contracted by 0.8% in the first quarter of this year, driven largely by a sharp increase in uncertainty in global trade. The uncertainty in the external environment is most evidently seen in a decline in gross fixed capital formation and in a stagnation in exports. Conversely, the expected rise in tariffs and the uncertainty in global supply chains prompted a rise in imports, mainly driven by intermediate goods and inventory stocking. Alongside the activity in export-intensive sectors, private consumption growth remained subdued, reflecting persistently low consumer confidence. The developments on the demand side of the economy were mirrored in a broadly based decline in value-added across the production side of the economy. The largest declines in value-added occurred in industry and construction, as well as in certain private-sector services, which up until last year had been among key drivers supporting economic growth. A limited set of indicators for the second quarter is showing a more favourable short-term developments ahead and a renewed growth in GDP.

Economic growth will gradually strengthen over the projection horizon, driven both by domestic factors and a gradual improvement in the external environment. An expected recovery in consumer confidence will enable private consumption growth in 2026 and 2027 to again align more closely with growth in household disposable income. Domestic demand will also be supported by growth in government investment and consumption, which will reflect institutional factors related to the utilisation of EU funds and also implementation of the long-term care act. Under the assumption of a normalisation of the situation in global trade and a reduction in uncertainty in the external environment, our expectation is that private-sector investment will also strengthen. Moreover, the recovery in foreign 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. Despite the anticipated gradual recovery in economic growth, the projections have been revised downward by 0.9 and 0.4 percentage points for 2025 and 2026, reflecting weaker short-term developments and a deteriorated medium-term global outlook.

The weaker economy will see employment fall this year, while employment growth will remain limited over the remainder of the projection horizon. Amid the weaker economic outlook, this year’s fall of 0.5% in employment will be driven by reduced demand for labour in the private sector, particularly in manufacturing, construction and certain marketable services. Employment growth will remain sluggish at 0.2% in 2026 and 0.5% in 2027, owing to the waning of the cyclical effects that drove strong growth after the pandemic, and the ongoing tightness of the labour market, which is evident in low unemployment, the relatively high vacancy rate, and the increasingly unfavourable demographic structure of the workforce in employment. Amid low employment growth, the strengthening of the economy will therefore depend strongly on the expected growth in labour productivity, which is projected to hover around its long-term average at 1.7% in 2025, 2.1% in 2026 and 1.9% in 2027. The projected rise in productivity growth is primarily based on the expectation of greater alignment between employment and economic activity than in the post-pandemic period.

After last year’s sharp fall, inflation will temporarily rise again this year, before stabilising at close to 2% towards the end of the projection horizon. In the first months of this year, increase in headline inflation was mainly driven by rising food prices, largely on the account of ongoing increases in food commodity prices. Inflation will strengthen further by the end of the year, as a result of the continued pass-through of rising labour costs into final prices, base effects in year-on-year inflation of other goods, and institutional factors influencing electricity prices. An even sharper rise in inflation this year will be prevented by the lower trending oil prices on global markets and appreciation of the euro, which are lowering import prices. The gradual slowdown in wage growth and the anticipated growth in productivity, together with fading impacts of institutional drivers and base effects, will support the inflation moderation in 2026 and 2027. It is projected to stabilise close to 2% by the end of the projection horizon, when it is also expected to be considerably more balanced in terms of contributions of inflation components. Compared to the December projections, the current inflation projection is 0.3 percentage point higher this year, unchanged in 2026 and 0.2 percentage point lower in 2027.

The baseline projection is accompanied by downside risks for economic growth, while the risks to the inflation projection remain balanced. The main risk is posed by the uncertainty surrounding the ongoing developments in trade policy. While the baseline projection assumes no change in tariffs from the projection cut-off date (21 May), the severe scenario envisages an additional rise in US tariffs on goods from China and the EU, retaliatory measures, and the persistence of heightened uncertainty surrounding economic policy. In the event of the realisation of this scenario, GDP growth would be 0.4 percentage points lower than under the baseline projection this year, 0.8 percentage points lower in 2026 and 0.2 percentage points lower in 2027. At the same time, the negative effects on economic activity under the adverse scenario are expected to dampen inflation over the medium term. On the side of domestic risks, unfavourable structural trends could limit productivity growth, which would lead to economic growth being lower and inflation higher than in the baseline projection. Inflation might also be raised by supply shocks in connection with the risks pertained to global supply chains, and extreme weather events, which have become increasingly frequent in recent years. Conversely an upside risk to economic growth might potentially be posed by additional government spending on defence and infrastructure projects at home and in broader EU context, which would also exert upward pressure on inflation.

Table 1: Macroeconomic projections for Slovenia, 2025 to 2027

Sources: SURS, Eurostat, Banka Slovenije projections

Note: * Based on national accounts deflators. ∆: difference between current forecasts and forecasts given in the December 2024 issue of the Review of macroeconomic developments and projections.

1Current Economic Developments and Assumptions

In the wake of the sharp increase in global uncertainty, the domestic economy contracted in the first quarter. This was driven in particular by a contraction in investment and by net trade, while year-on-year growth in private consumption and government consumption also slowed notably. For the second quarter, a limited set of indicators currently points to renewed GDP growth.

1.1International situation and external assumptions

Given the constraints on global trade, the indicators for the second quarter point to weaker global economic growth, while the growth projections for this and next year have been revised downwards.

Developments in economic activity in the major advanced economies are varying. GDP in the US fell by 0.1% in the first quarter of this year, having expanded by 0.6% in the previous quarter. Although private consumption and investment increased, businesses and households built up their inventories of goods in the expectation of higher costs following the announcement of tariffs, which drove a significant increase in imports and a strongly negative contribution to growth by net trade. The US thus suffered its first decline in economic activity in the last three years. GDP also contracted in quarterly terms in Japan, by 0.2%. This was again a sharp contrast to the previous quarter, when growth stood at 0.6%. Quarterly GDP in the UK was up 0.7%, an improvement of 0.6 percentage points compared with the previous quarter, and thus reached its highest level of the last three quarters, driven primarily by the service sector. Quarterly GDP in the euro area was also up slightly on the previous quarter, at 0.3%.

The major developing economies all saw quarterly rises in GDP, most notably 1.6% in India, 1.2% in China and 0.2% in Brazil. Economic growth in China was down 0.4 percentage points on the final quarter of last year, and was 0.2 percentage points less than had been expected by the markets. Although the Chinese economy is the focus of the trade conflict with the US, it is still recording relatively robust growth amid significant fiscal and monetary support.

The global composite PMI remained in the zone of expansion in April, but slipped to 50.8 points, its lowest figure of the last 17 months, largely on account of a sharp decline in new export business. The global services PMI also declined to 50.8 points, while manufacturing has again fallen into the zone of contraction with a PMI of 49.8 points. The flash estimates of May’s indicator in major global economies mostly point to a continuation of the weak economy. The PMI was slightly below the 50 mark in the euro area, the UK and Japan, but strengthened to 52.1 points in the US on the basis of a slight uptick in both sectors, although the main factor at work in manufacturing was a build-up of inventories.

According to the ECB’s June projections, global economic growth excluding the euro area is expected to be slightly lower this year than last year. Having reached 3.6% last year, it is expected to reach 3.1% this year, down 0.3 percentage points on the March projections. The revision largely reflects the direct effects of the new trade measures, and the indirect effects of these measures via trade links, increased uncertainty and the worsening mood. The projection for 2026 has consequently been revised downwards by 0.3 percentage points compared with March, to 2.9%, while the projection for 2027 remains unchanged at 3.2% (see Table 1.1.1).

Economic growth in the euro area stood at 0.3% in the first quarter, but is projected to be more modest in the second quarter amid the increased uncertainty in global trade.

Euro area GDP increased by 0.3% in the first quarter of this year, 0.1 percentage points more than in the final quarter of last year (see Figure 1.1.1, left). The growth was driven by stronger domestic demand, most notably in Germany and Spain. Of the major euro area countries, GDP growth was highest in Spain (0.6%) and Germany (0.4%), followed by Italy (0.3%) and France (0.1%). The largest economic contractions were seen in Slovenia (0.8%) and Portugal (0.5%), while Ireland (3.2%) and Cyprus (1.3%) saw the highest growth. Domestic demand is also being reflected in inflation, service price inflation in particular, which has remained elevated at around 4% for a year and a half now. Headline inflation has nevertheless slowed slightly in recent months (reaching 2.2% in April), driven largely by energy prices.

Despite an encouraging start to the year, the short-term indicators point to slightly weaker economic developments in the second quarter amid rising uncertainty in connection with US trade policy, which is suffocating investment and household consumption. The flash estimate of the composite PMI suggests that after falling in April it will decline further in May, below the 50 mark to 49.5 points, the lowest figure of the last six months (see Figure 1.1.1, left). The decline is primarily attributable to a downturn in new orders, including foreign orders. There was a particularly sharp deterioration in the services PMI, which recorded its largest fall in 16 months to hit 48.9 points. The manufacturing PMI by contrast rose to 49.5 points in May, its highest figure for 33 months, but still in the zone of contraction.

According to the ECB’s June projections, euro area GDP is forecast to grow by 0.9% this year, 1.1% in 2026 and 1.3% in 2027 (see Figure 1.1.1, right). Economic growth over the projection horizon is set to be supported by government spending on defence and infrastructure, rising household income, and a gradual decline in uncertainty and a recovery in foreign demand.

In the wake of the deterioration in the international outlook, June’s assumptions project lower oil prices and a slower recovery in foreign demand for Slovenia compared to the December projections.

The uncertainty and weak activity in the global economy are reflected in the assumptions of the external environment.[1] The projections for growth in foreign demand for Slovenia[2] for this year and next year are 0.6 percentage points and 0.7 percentage points down compared with December. The average over the projection horizon is thus projected to be 2.2 percentage points lower than pre-pandemic average.[3] Another unfavourable change compared with the December projections in terms of export activity is the assumption of an appreciation in the euro of approximately 5.4% against the US dollar on average over the projection horizon, largely as a result of a fall in investor confidence in the US debt and capital markets. The weaker economic outlook is also reflected in the assumption for oil prices. These are projected to average USD 5.8 less over the projection horizon than in the December projections. By contrast the assumption for prices of non-energy industrial goods are higher than in December, primarily due to this year’s development in global food prices (see Table 1.1.1).

1.2Domestic economic environment

The economic situation in Slovenia worsened in the first quarter, driven largely by the elevated levels of uncertainty.

The improved confidence and solid performance in certain monthly indicators of private consumption suggested that the economy remained in relatively good shape in the first quarter, but according to national accounts activity declined. GDP was down 0.8% in quarterly terms and 0.7% in year-on-year terms, with the economy being outperformed by the euro area overall for the first time in years. These developments are indicative of unfavourable business conditions in the first quarter after a challenging last year, which is analysed in detail from the perspective of corporate performance in Box 1.2.1.

Elevated levels of uncertainty, higher energy prices compared with partners outside the EU, disruption of international trade links, crisis in European industry and crunch on the housing market are causing investment to dry up. In the first quarter, investment was down in year-on-year terms for the fourth consecutive quarter. The decline stood at 5.1%, taking its contribution to GDP growth to -1.1 percentage points (see Figure 1.2.1, left). Manufacturing firms are still reporting insufficient demand and rather low capacity utilisation, which is curtailing investment in machinery and equipment. The situation in residential construction is even worse, by a significant margin: investment in the first quarter was down 14.3% in year-on-year terms amid weak demand and high prices on the real estate market.

The growth contribution from domestic final consumption was relatively weak in the first quarter. Final consumption was up just 1.0% in year-on-year terms, with growth in private consumption recording its lowest rate since 2023 at 0.4%. Despite further gains in real wage bill, consumer uncertainty remained high according to the SURS surveys: consumers were expecting inflation and unemployment to rise, and the economy to worsen. Growth in government consumption also slowed, albeit mainly for technical reasons, the year-on-year effect of last year’s inclusion of supplemental health insurance in compulsory contributions having dropped out of the calculation.

The year-on-year recovery in exports ended in the first quarter, and the contribution to GDP growth by net trade was negative amid a build-up of inventories. In an environment of weak foreign demand, merchandise exports were down in year-on-year terms, although a small increase in services exports meant that aggregate exports were broadly unchanged. Import developments were stronger: firms were increasing their inventories due to high uncertainty, and imports of miscellaneous business services were also elevated. The contribution to growth made by net trade stood at -1.4 percentage points (see Figure 1.2.1, left).

Surveys suggest unfavourable competitive position of manufacturing firms on foreign markets, while the situation in construction and private sector services also deteriorated.

Growth in value-added in manufacturing has long successfully struggled against the adverse international situation, but turned negative in the first quarter, as had previously been signalled by the monthly output index. Value-added was down 2.5% in year-on-year terms, which reduced GDP growth by 0.4 percentage points (see Figure 1.2.1, right). In terms of technological complexity, the increase in activity was recorded only in the high-technology sector, and even there thanks solely to the good performance of pharmaceutical firms.

Manufacturing firms have been reporting a deterioration in their competitive position ever since the outbreak of the energy crisis. The survey competitiveness indicator on EU markets stood at -13.0 percentage points in the first quarter, down 9.9 percentage points on its average between 2005 and 2024, while the indicator on markets outside the EU stood at -11.0 percentage points, down 6.6 percentage points on its long-term average.

In the first quarter, construction saw considerable misalignment between its confidence indicators and its real activity indicators. The survey indicator of the amount of construction put in place was up significantly on the final quarter of last year, while similar was true of order books. Value-added by contrast was down 3.9% in quarterly terms, while the index of the amount of construction put in place saw a comparable negative change, mostly because of a decline in activity in civil engineering work. Value-added was down 6.0% in year-on-year terms, which reduced GDP growth by 0.3 percentage points (see Figure 1.2.1, right).

Private sector services saw a halt to the growth in value-added. This was mainly attributable to weak domestic demand, while year-on-year growth in exports was also down on the second half of last year.[4] The deterioration compared with the final quarter of last year was broadly based: year-on-year changes in value-added were comparatively unfavourable in the vast majority of service categories. Aggregate year-on-year growth in value-added was close to stagnation in the first quarter at -0.1%, down from 1.8% in the final quarter of last year. Year-on-year growth in value-added in public services remained relatively solid at 1.4%.

The data for the second quarter points to a slight improvement in the economic sentiment, mostly due to a lesser pessimism among consumers. This supports the current relatively favourable estimate of quarterly GDP growth.

In May, the consumer confidence indicator hit its highest level since last summer, in the wake of less pessimistic assessments of financial and economic situation. This contributed 1.1 percentage points to the overall rise of 0.7 percentage points in the economic sentiment indicator (see Figure 1.2.2, left). At the same time, confidence in private-sector services other than retail remained high, with firms again assessing their current and expected demand positively in May. Retail confidence was down significantly on the first quarter. Retail firms reported weak sales, although this indicator is typically highly volatile.

Manufacturing confidence remains low and stable. The indicator has remained around -8.0 percentage points for almost two years now, and the total order books indicator is also low and stable (see Figure 1.2.2, right). The survey indicator of current output was slightly negative in May for the second consecutive month, worse than in February and March.[5] Construction confidence declined slightly in May, as firms raised their assessment of the amount of construction put in place, but also reported a slight decline in total order books, for the first time since January.

Based on a modest set of short-term indicators, the nowcast for quarterly GDP growth in the second quarter currently averages 0.9% (see Figure 1.2.3, left). The forecast is mainly supported by April’s rise in retail turnover and May’s improvement in the economic sentiment.

The current account surplus in the first quarter narrowed in year-on-year terms, largely as a result of a decline in the merchandise trade surplus.

The current account recorded a surplus of EUR 446 million in the first quarter of this year, down EUR 230 million on the same period last year. With the terms of trade virtually unchanged, the merchandise trade surplus narrowed by EUR 134 million in year-on-year terms (see Figure 1.2.3, right). Nominal merchandise imports were up 2.9% in year-on-year terms, while exports were up 1.5%. In terms of the broad economic categories according to the SURS data,[6] the narrowing of the surplus was primarily attributable to a decline in exports of machinery and equipment (in particular exports of specialised machinery to Germany and road vehicles to France), and increased imports of non-monetary gold. The largest declines in the merchandise surplus in the first quarter were recorded vis-à-vis Germany[7] and Croatia,[8] while the largest increases were vis-à-vis Russia and Switzerland.

The services trade surplus also narrowed in year-on-year terms, by EUR 60 million. Nominal services imports in the first quarter were up 10.2% in year-on-year terms, while exports were up 4.8%. The largest factors in the year-on-year narrowing of the surplus were a decline in exports of construction services, and an increase in imports of charges for the use of intellectual property. Transport services remained the most important factor in the services trade surplus of EUR 708 million, accounting for 60% of the total. At the same time the deficit in secondary income widened by EUR 80 million in year-on-year terms (largely as a result of a decline in inflows of other current transfers), while the deficit in primary income narrowed slightly.

The 12-month current account balance stood at EUR 2.7 billion, down EUR 68 million on a year earlier. The largest factor was the services trade surplus of EUR 3.6 billion.

Demand for labour is slowing, but wage growth is particularly pronounced in the public sector.

The fall in employment continued in the first quarter: it stood at 1,091.5 thousand, down 0.5% on last year, but it nevertheless remains high. It is down 15.3 thousand or 1.4% on its record high in the final quarter of 2023 (see Figure 1.2.4, left). The year-on-year contraction was broadly based across sectors (in the private sector). The largest falls were seen in manufacturing, professional, scientific and technical activities, administrative and support service activities (which includes staffing agencies), and construction. Hiring is continuing in mostly public services. Further evidence of the reduced demand for labour comes from the vacancies data. The number of vacancies in the first quarter was down 9.1% in year-on-year terms, most notably in construction. The vacancy rate nevertheless remains high at 2.3% compared with its long-term average (1.7%).[9] Registered unemployment in April was down 1.9% on the same month last year. The registered unemployment rate stood at 4.6% in March, close to its level of last year, while the surveyed unemployment rate stood at 4.0% in the first quarter, up 0.6 percentage points on a year earlier.

Wage growth as measured by compensation per employee stood at 6.7% in the first quarter, up 0.5 percentage points on last year’s figure. The introduction of the new pay system meant that it was particularly pronounced in mostly public services, at 11.2%, while the year-on-year rate in the private sector is slowing and reached 5.4% (see Figure 1.2.4, right). Amid the fall in value-added, real wage growth at 4.5% deviated significantly from the developments in productivity, which was down 0.2% in year-on-year terms.[10]

Despite higher service price growth, headline inflation slowed in May.

Year-on-year inflation as measured by the HICP decelerated to 1.9% in May, down from 2.3% in April (see Figure 1.2.5, left). The moderation was driven by lower contributions from all categories other than service price inflation, whose year-on-year growth rate increased again. The price developments in May thus indicate persistent influence of growing labour costs, but also reflect the uncertain economic conditions, particularly in manufacturing. These are also reflected in energy prices, which were down 6.4% in year-on-year terms in May (compared with 4.4% in April), the larger decline being driven almost entirely by lower prices of refined petroleum products. These declined in current terms for the third consecutive month, by more than 4% in May.[11] This was attributable to the fall in oil prices on global markets, which reflects the decline in demand – in the wake of the slowdown in the global economy caused by the uncertainty surrounding the introduction of tariffs – and an increase in output by Opec+ members.

Food price growth also slowed in May, to 4.9% (down from 5.4% in April), driven largely by prices of unprocessed food. The persistently high growth seen over the last 12 months was primarily attributable to current price rises, largely in reflection of the situation on global food commodity markets in the wake of numerous adverse weather events, the rising price of fertilisers, and the rise in livestock disease in Europe. Cost pressures on food prices are continuing to be reflected in robust growth in prices along production chains,[12] with retail firms also increasingly expressing their intention to raise prices.[13] Another indication of the change in circumstances with regard to food prices comes from growth in prices of food excluding beverages and tobacco, which excludes the impact of tax changes such as excise duties on tobacco products and the sweet beverage tax. In April the rate converged fully on overall food price inflation at 5.1% (see Figure 1.2.5, right).[14]

Core inflation excluding energy and food slowed to 2.3% in May, down from 2.5% in April. The slowdown was driven entirely by non-energy industrial goods (hereinafter: other goods), which in May were up 0.1% in year-on-year terms (compared with 1.0% in April). The sharp slowdown in price growth coincides with a decline in activity in manufacturing in connection with insufficient demand and low capacity utilisation, which are being reported by firms, and consequently with a build-up of inventories in the early part of the year before the imposition of tariffs by the US. The easing of cost pressures[15] is additionally being supported by the appreciation in the euro. According to the initial data for May, a major factor in the decline in year-on-year other goods inflation was the untypically large current fall in prices of clothing and footwear.

Service price inflation strengthened by contrast, to 4.2% (up from 3.8% in April), and continued to be driven in particular by catering services, where food prices account for a significant share of input costs. Services in the restaurants and hotels category, the majority of which are accounted for by catering services, were up 5.8% in year-on-year terms in May (compared with 4.8% in April).[16] Labour costs also play a significant role in services prices, and their real year-on-year growth rate strengthened to 3.7% in the first quarter of this year.[17]

The consolidated general government deficit widened as growth in revenues slowed.

The consolidated general government deficit over the first four months of the year amounted to EUR 288 million, EUR 234 million more than in the same period last year. There was a year-on-year improvement in the local government position, while the ZZZS and the state budget in particular saw deteriorations in their positions.

Consolidated general government revenues over the first four months of the year were up 5.3% in year-on-year terms, the rate of growth halving over this period. The slowdown in year-on-year growth in revenues was primarily a reflection of slower growth in tax revenues than in the same period last year. Corporate income tax revenues were down in year-on-year terms, as a result of smaller settlements for 2024 compared with last year’s settlements for 2023, while excise duty revenues were also down. Amid low growth in VAT revenues and larger inflows of carbon tax (which was raised in September of last year), aggregate revenues from taxes on goods and services were up 3.1%. This is in line with the low growth in private consumption in the early part of the year. This year’s adjustment in tax bands and allowances has reduced growth in personal income tax revenues. Last year’s contribution to growth in revenues made by the transformation of voluntary supplementary health insurance into compulsory health contribution has partly been compensated by the temporary tax on banks assets for the purpose of financing post-flood reconstruction. Revenues from the EU budget were down in year-on-year terms, as a result of slower disbursements.

Consolidated general government expenditure over the first four months of the year was up 7.9% in year-on-year terms. Growth in expenditures on pensions (7.5%) and wages (7.1%) was slightly lower. January’s wage payments saw the first step made in raising wages for public-sector employees within the framework of the new wage system. The gradual introduction of the reform to the wage system means that its overall impact is not yet fully evident, and there is also a high base effect in connection with the payment of leave allowance (March last year, no later than May this year). Interest expenditure increased by more than a fifth. Investment expenditure and transfers increased slightly, while subsidies were close to their level of the previous year.

2Projections

The increased uncertainty in global trade is already being reflected in short-term economic developments, and is having an impact on the medium-term outlook via a deterioration in the assumptions for the external environment. Employment will fall this year, and its growth will remain limited over the remainder of the projection horizon, leaving the expected rise in economic activity heavily dependent on growth in labour productivity. The latter will be also significant for development in inflation, which after rising temporarily this year is projected to gradually slow to its 2% target.

2.1Economic activity

After reaching 1.6% last year, GDP growth is projected to moderate to 1.3% this year. Under the assumption of reduced uncertainty in the international environment and a stabilisation of the situation in global trade, growth will be higher again in 2026 and 2027 at 2.4%.

This year’s subdued growth, projected to be the lowest since 2020, reflects the contraction in activity in the first quarter driven by the pronounced trade uncertainty in the wake of the announcement of tariffs by the US. Further evidence of this comes in particular from the sharp decline in private investment, and the rise in imports in connection with the precautionary build-up of inventories. Private consumption also remained subdued in the early part of the year, despite continuing growth in real disposable income. In addition to the adverse short-term developments, the medium-term outlook surrounding the external environment is also worse than in the December projections. The greatest impact on the economic growth projections comes from the reduced growth in foreign demand, with the appreciation of the euro posing additional headwinds to expected export activity. The technical projection update, which relates to the model evaluation of the impact of data for the first quarter, and the revisions to the assumptions for the external environment relative to the December projections, shows GDP growth of less than 1% this, which in the final projection is balanced by a positive assessment (see Figure 2.1.1, left). This relates largely to the assessment of a temporary decline in activity in the first quarter owing to the uncertainty surrounding tariffs, which according to expectations should be partly compensated in the second half the year by increased quarterly GDP growth, but also to a lesser extent to statistical effects owing to anticipated adjustments of seasonal impact.

After slowing this year, economic growth will strengthen again over the remainder of the projection horizon, standing at 2.4% in 2026 and 2027. The main driver of GDP growth will remain private consumption, while in 2026 overall domestic consumption will also be significantly supported by government. The strengthened growth will also be based on a recovery in investment, private and government, which will be supported by the waning of uncertainty, improved financing conditions, and the utilisation of EU funds. The stabilisation of the situation in global trade and growth in Slovenia’s trading partners is expected to also drive a gradual strengthening in export growth, with the contribution to growth by net trade turning positive again by the end of projection horizon (see Figure 2.1.1, right).

 

In the wake of increased consumer pessimism in the early part of the year, growth in private consumption growth will be relatively subdued this year at 1.1%. It will strengthen again to 1.9% in 2026 and 2.4% in 2027.

Consumer confidence remains stubbornly low, and it further deepened at the end of last year and in the early part of this year. According to the SURS data on business trends, it was primarily attributable to the uncertain economic outlook and a downturn in expectations regarding future employment status. This was reflected in private consumption, which has mostly been stagnating in current terms since the second half of 2024, despite the continuing real growth in household disposable income. The initial data for the second quarter shows an improvement in confidence, while the data on card payments also points to growth in private consumption. With real wages continuing to rise and employment gradually recovering, our expectation is that consumer pessimism will gradually wane, which will allow growth in private consumption to be more aligned with growth in disposable income (see Figure 2.1.2, left). The saving rate will nevertheless remain at elevated levels, on account of the precautionary saving and subdued consumption at the end of last year and in the early part of this year. It will average 14.3% between 2025 and 2027, approximately 1 percentage point above its long-term average (see Figure 2.1.2, right).

Private investment is expected to decline this year due to significant uncertainty surrounding economic policies and the geopolitical situation in the international environment. A gradual stabilisation of the situation is projected to support renewed growth over the remainder of the projection horizon.

The pronounced negative carry-over effect from 2024, stemming from a significant slowdown in investment activity in the second half of last year, and the significant decline in value-added in industry and construction in the first quarter of this year will be key contributors to the projected 3.7% decline in private investment in 2025. The subdued level of in investment in machinery and equipment by firms in the early part of this year reflects their cautious behaviour amid an unstable international environment, marked by pronounced uncertainty in the economic situation, particularly with regard to trade policies. This caution is also evident in an increase in imports of goods and services, largely driven by firms building up inventories. Despite a projected gradual improvement in economic sentiment in the second half of the year, downside risks to corporate investment activity remain elevated.

The projected 6.6% decline in housing investment in 2025 will be driven by a continued decline in the amount of construction put in place and the deterioration in value-added in construction from 2024. The absence of a recovery in the number of issued building permits and the volume of transactions in the residential real estate market during the first quarter of this year further dampen the outlook for this investment segment. These factors are exacerbating the persistent imbalance between supply and demand in the real estate market, contributing to continued growth in real estate prices.

Private investment is expected to gradually recover in 2026 and 2027. Improved financing conditions will play a more prominent role compared to previous years, alongside the gradual stabilisation of the international environment, reflected in growth in foreign demand for Slovenia. However, toward the end of the projection horizon, the pace of investment activity will be somewhat constrained by the conclusion of funding from the EU’s recovery and resilience facility (NGEU) in 2026 (see Figure 2.1.3, right). Accordingly, private investment growth is projected at 3.6% in 2026 and 1.9% in 2027.

The government sector’s positive contribution to economic growth will come mainly from consumption, but also to a lesser extent from investment next year.

Growth in government investment will mainly support economic activity in 2026, when disbursements from the NGEU programme come to an end and also under the impact of the elections, while the government contribution is expected to be approximately neutral in 2025 and 2027. In line with the government forecasts, loan disbursements from the NGEU programme are assumed to be lower than under the December projections. The volume of investment over the projection horizon will also be affected by the reconstruction following the floods of 2023, which is making slower progress than originally expected. Defence spending is rising by approximately 0.1% of GDP per year, as envisaged in the 2023 Resolution on the overall long-term programme for the development and equipping of the Slovenian Armed Forces until 2040.[31] There are risks that defence spending will be higher, but also in the form of dual use, which is evident from the new draft resolution from May of this year, which had not been passed by the projections cut off date. Government investment is projected to record real growth of 0.9% this year, and 2.7% in 2026, but is then expected to decline by 0.8% in 2027. This will primarily be attributable to the end of the NGEU programme in the previous year, which will most likely not be fully compensated for by increased disbursement under the current EU financial framework. Government investment will remain high as ratio to GDP, at slightly below 5%.

Government consumption will grow more slowly over the projection horizon than it did last year.[32] Its growth will average 2.7%. The implementation of rights in the area of long-term care will drive the growth this year, and next year in particular. Most notably these include the right to home care, which will be available to beneficiaries as of 1 July 2025, and the right to institutional care, which will be in place as of 1 December 2025.[33] The upward revision to growth in government consumption in 2025 reflects the assumption of the inclusion of Šoštanj Power Station in the government sector.[34] Growth in government consumption will also be driven by growth in employment, which is still projected to average approximately 1% annually. Similarly to investment, the end of the NGEU programme (2026) will also have an impact in slowing growth in government consumption at the end of the projection horizon. Nominal growth in government consumption will remain high under the impact of the wage agreement, which began implementation in 2025.

Given the uncertainties in the international environment, which are being reflected in developments in foreign demand, international trade is expected to see slow growth this year.

Last year a number of adverse factors[40] from previous years gradually waned, which was reflected in a 3.2% rise in exports and a 3.9% rise in imports. Amid the pronounced uncertainty surrounding tariffs, the situation in the export sector again worsened this year. Real growth in exports decreased for 0.3% in the first quarter, which is lower than growth in foreign demand for Slovenia, indicating a loss of market share in foreign markets (see Figure 2.1.4, left).

Over the following months we expect that the gradual fading of uncertainty and the anticipated stronger alignment with external demand trends will contribute to an export recovery. This is supported by the expectations of firms, which improved slightly following a decline in the early part of the year (see Figure 2.1.4, left). Export growth will nevertheless stand at just 0.8% this year (see Figure 2.1.4, right), amid the moderate growth in foreign demand and the appreciation of the euro, which will further curtail the export activity of Slovenian firms this year. Amid slower growth in domestic demand components and weaker exports, this year’s growth forecast for imports has been revised downwards to 1.5%.

Under the assumption of a stabilisation of the situation in the external environment, a recovery in foreign demand and the expected developments in relative export prices, growth in international trade will strengthen next year. Export growth will rise to 3.9% the following year, slightly above its long-term average,[41] before strengthening again to 4.7% in 2027. On the import side the recovery in household consumption and the rise in investment activity will drive higher growth, which is projected to reach 4.4% in 2026 and 4.3% in 2027.

In the wake of these developments the contribution to GDP growth by net trade will be negative in 2025 and 2026, before strengthening as global demand recovers to reach 0.6 percentage points in 2027.

Compared with the December projections, the June economic growth projections for 2025 and 2026 are 0.9 percentage points and 0.4 percentage points lower respectively.

The revised projection for 2025 reflects the realisation of the downside risks regarding the external environment from the December projections. This is being reflected above all in weaker-than-expected export and investment activity on the part of firms, which is reducing the growth projection for this year by approximately 1.5 percentage points (see Figure 2.1.5). Growth in private consumption will also be more subdued this year than previously projected: it is projected to be 1.3 percentage points lower, which accounts for an additional 0.6 percentage points of the downward revision in this year’s GDP growth forecast. An even larger revision to the economic growth projection is being prevented by the positive contribution by inventories, which is forecast at approximately 1 percentage point this year, and is primarily attributable to higher imports of intermediate goods amid the uncertain situation in supply chains and the rising costs related to tariffs.

The uncertainty in the external environment is also expected to reduce growth in foreign demand next year, which in conjunction with the appreciation of the euro will lead to export growth in 2026 being lower than projected in the December projections. In line with the revised forecast for employment growth, growth in private consumption in 2026 will also be lower than in the previous projections. The 0.4 percentage points downward revision in GDP growth in 2026 is attributable to revisions to net trade and private consumption, while the adverse impact on gross investment from foreign demand was compensated for by the improved forecast for financing conditions. The economic growth projection for 2027 remains unchanged relative to the December projections.

2.2Labour market

Employment will fall this year, but will gradually recover over the remainder of the projection horizon as economic growth strengthens.

Employment is projected to fall by 0.5% this year, largely on account of a further deterioration in the labour market in the private sector. Employment in the private sector will fall for the second consecutive year, by 0.8% on this occasion. It will remain relatively stable in the government sector by contrast, with growth of 1.0%. In line with the anticipated recovery in economic activity, a gradual improvement in developments on the labour market is projected for 2026. Employment growth will remain low at 0.2%, before approaching its long-term average (0.6%) towards the end of the projection horizon at 0.5% (see Figure 2.2.1, left). The relatively limited recovery is attributable to the ongoing deterioration in the demographic structure of the workforce in employment, which will also adversely affect the availability of labour in the future. The employment developments will thus be slower than would be expected in light of economic growth, which will be reflected in higher growth in labour productivity exceeding its average of recent years over the projection horizon. Another factor will be the waning of the adverse cyclical effects, labour hoarding in particular, that temporarily reduced productivity after the pandemic (see Figure 2.2.1, right).

The surveyed unemployment rate will remain at historically low levels over the projection horizon.

The surveyed unemployment rate is projected at 3.5% in 2025. This year’s fall in employment will thus have no major impact on the unemployment rate, with the decline in the number of employees mostly attributable to retirements, which are not reflected in the surveyed unemployment statistics. The unemployment rate is projected to fall slightly further by the end of the projection horizon, to 3.4%, in line with the recovery in economic activity. There is nevertheless no expectation of a larger fall in unemployment, as our forecasts suggest that the rise in employment in the future will continue to be driven by the hiring of foreign nationals, which generally does not contribute to a fall in domestic unemployment.

Wage growth will gradually slow, but will remain relatively robust, and will be higher in the government sector than in the private sector. Real wage growth will also remain positive, and will continue strengthening household purchasing power.

Wage growth is projected at 5.5% in 2025, down slightly on last year’s rate of 6.2%.[42] Wage growth will be more driven this year by the government sector, where a rate of 8.7% is projected, compared with the more moderate rate of 4.6% in the private sector. This will bring a reversal compared with the developments in previous years, when growth in the private sector outpaced growth in the government sector, which will help to maintain balance between pay in the two sectors. Aggregate wage growth is expected to gradually slow over the remainder of the projection horizon. Despite a more pronounced slowdown in the government sector, wage growth there will remain higher than in the private sector throughout the projection horizon. It will be relatively stable in the private sector at 4.2% in 2026 and 4.0% in 2027, while the projections for the government sector are 6.7% in 2026 and 4.8% in 2027 (see Figure 2.2.2, left). While the high wage growth in the government sector will be attributable to the implementation of the pay reform, growth in the private sector will continue to be driven by the persistent tightness of the labour market and a structural shortage of qualified labour. The maintenance of relatively high wage growth will thus be made possible by the anticipated growth in productivity. Amid the gradual slowdown in inflation, real wage growth will also remain favourable: it will average more than 2.0% over the projection horizon, and will continue to support growth in household purchasing power (see Figure 2.2.2, right).[43]

2.3Inflation

Inflation will temporarily strengthen this year, driven by an increased contribution by food price inflation, the continuing pass-through of higher labour costs, and administrative factors in energy prices.

While headline inflation as measured by the HICP stood at 2.0% last year, it slightly exceeded this level in the early part of 2025. The rise was driven mainly by movements in food prices, which are reflecting the situation on global food commodity markets, and also to a lesser extent by prices of other goods. Energy prices meanwhile prevented a larger increase in headline inflation. Their year-on-year decline was initially attributable to government measures to cap electricity prices, and then to the fall in oil prices on the wholesale markets. Headline inflation is expected to strengthen further over the remainder of the year, mainly as a result of a slowdown in the year-on-year decline in energy prices and higher other goods inflation. In both subcomponents the change in growth will mostly be attributable to a base effect, while certain administrative factors will also have an impact on energy prices. Food prices will record the highest inflation this year, and will thus be the main factor in headline inflation alongside services prices. Headline inflation is accordingly projected at 2.5% this year (see Figure 2.3.1, left), albeit with relatively large differences between the subcomponents (see Table 2.3.1).

The slowdown in inflation over the next two years will be driven by slower growth in prices of food, services and other goods, while energy price growth will gradually strengthen.

Headline inflation will moderate over the next two years to 2.2% in 2026 and then to 1.9% in 2027. Alongside food price inflation, the main factor in 2026 will be service price inflation, driven by the pass-through of higher labour costs into final services prices, while the renewed positive contribution from energy prices will also act to raise inflation. Inflation will decline below 2% in 2027, largely as a result of the slowdown in service price inflation as labour costs growth gradually moderates. A more pronounced decline in headline inflation will be prevented by higher year-on-year energy price inflation as emissions trading begins under the ETS 2. Under the assumption of stable supply chain environment, prices of other goods will make a limited contribution to headline inflation in 2026 and 2027 (see Figure 2.3.1, left).

Headline inflation in Slovenia is projected to be 0.5 percentage points and 0.6 percentage points higher than in the euro area in 2025 and 2026, respectively,[44] on account of higher food price inflation this year, and energy price inflation next year. Domestic headline inflation will be 0.1 percentage points lower than in the euro area in 2027, as a result of lower core inflation in Slovenia.

In addition to regulatory measures, energy prices will also be affected by the projected decline in prices on wholesale markets, which is being additionally strengthened by the appreciation of the euro.

While the year-on-year fall in energy prices averaged 2.3% in 2024 amid great volatility, they have continued to fall this year, and will be down 2.6% on an annual basis. The decline will primarily be attributable to a fall in wholesale energy prices, oil in particular (see Figure 2.3.2, left), which is being deepened by the appreciation the euro (see Figure 2.3.2, right).[45] In addition to motor fuels, the year‑on‑year decline in energy prices will also be driven by solid fuels, primarily via a base effect, as their prices have mostly declined over the last two years and are expected to stabilise in the future. Year‑on‑year energy price inflation will thus be relatively volatile over the course of the year, which will to a considerable extent reflect the impact of the government measures on electricity prices. In January and February of this year, the growth was held down by the cap on supplier prices and the cut in the tariff rate for the first network block, while March to September will also see a negative base effect from the introduction of the new approach to billing network charges. An inflationary effect by contrast will come from the resumption of payments of the contribution for CHP and renewables in July of this year,[46] while the final part of the year will see a positive base effect in connection with the cap on supplier prices moving into the high season for billing network charges in November 2024. The energy price inflation projection is also accompanied by the risk of regulatory changes: growth might deviate from the projection if the electricity network charge is adjusted and the cap on the level of motor fuel retailers' profit margins, which expires in June, is lifted.

Energy prices are projected to increase over the next two years. More precisely, the energy price inflation is projected at 1.1% in 2026 and 3.5% in 2027. The positive growth in 2026 is attributable to a base effect in connection with this year’s government measures, although inflation will continue to be curbed by prices of motor fuels, particularly in the first half of the year. The uptick in inflation in 2027 will primarily be attributable to the beginning of emissions trading under the ETS 2, which in our assessment will mainly be reflected in higher prices of motor fuels.

The contribution of food prices to headline inflation will temporarily strengthen as prices of food commodities rise, before gradually diminishing.

Food price inflation slowed to 1.9% last year as the effects of past shocks dissipated, but will strengthen again this year to reach 4.7%. The rise will be attributable primarily to current price increases, which have been present since August of last year and mainly reflect developments on wholesale food commodity markets (see Figure 2.3.3, left), but also in part the pass-through of higher labour costs into final prices and the dissipation of a base effect that was helping to reduce price growth in the previous year. According to our estimates, the rise in the VAT rate on sweet beverages from the beginning of the year is projected to add 0.4 percentage points to annual food price inflation, while an additional 0.2 percentage points is projected to come from the rise in excise duties on tobacco products and alcoholic beverages, which entered into force in June. Year-on-year food price inflation, which stabilised at 4.9% in May, has risen by 4.3 percentage points over the last 12 months (see Figure 2.3.3, right). The expectation for the remainder of the year is that food price inflation will initially slow only modestly and will remain at elevated levels until the beginning of next year, before then moderating faster, as a result of the impact of tax changes dropping out of the calculation, the projected stabilisation of the situation on food commodity markets, and a base effect from the persistence of current price rises this year. Food price inflation is projected at 3.0% in 2026, and 2.6% in 2027. The moderation will be broad-based and will be driven by processed and unprocessed food prices.

Core inflation will mainly be driven by services prices, and its moderation will be based on a gradual slowdown in labour cost growth.

Core inflation as measured by the HICP excluding energy and food will decline to 2.7% this year, down from 2.9% last year (see Figure 2.3.4, left). It had accelerated in the first four months of this year, before falling slightly in May to 2.3%. The expectation over the remainder of the year is that it will approach 3%, largely due to slightly faster growth of other goods prices, which mostly derives from base effects. It will then gradually slow to 2.1% in 2026 and 1.3% in 2027.

Core inflation will mainly be driven by services prices throughout the projection horizon. Service price inflation itself will be driven mainly by the pass-through of rising labour costs into final prices, which will be particularly pronounced in public services, and will in part reflect the impact of the wage reform in the public sector. From 4.8% last year, service price inflation will slow to 3.6% this year and 3.3% next year, and then to 1.9% in 2027. Alongside cost factors, the persistence of relatively high service price inflation is also attributable to a recovery in growth in private consumption, which will allow profit margins to be maintained or even to recover slightly this year and next year.

Other goods inflation by contrast will be considerably lower than service price inflation over the projection horizon. From 0.6% last year it will strengthen to 1.6% this year, driven largely by base effects such as the unusually large discounts in prices of clothing and footwear in August of last year. In the wake of the anticipated further stabilisation of production chains and a slowdown in growth in import prices, in part as a result of the appreciation of the euro, other goods inflation will slow further over the next two years to 0.2% and 0.4%. The projections for the 2025 to 2027 horizon are thus broadly in line with the long-term average (0.9% between 2000 and 2019).

Core inflation over the projection horizon will mostly be driven by growth in compensation per employee, which has an impact on service price inflation in particular, the most wage-intensive inflation subcomponent. This will be accompanied by a renewed positive contribution from unit profits (see Figure 2.3.4, right). Conversely core inflation will be curtailed mainly by the recovery in labour productivity growth,[47] but will be lower than the rise in the GDP deflator on account of improved terms of trade, which reflect higher growth in export prices than import prices, and the impact of relative deflators, particularly on account of higher deflators for government consumption than for private consumption. The pass‑through of labour costs into consumer prices of services and industrial goods is analysed in two steps. The first step is insight into the pass‑through of these costs into domestic prices as measured by the GDP deflator, which is then further adjusted for methodological differences between the deflator and core inflation.[48]

The increase in the headline inflation projection for this year is mainly attributable to energy and other goods inflation, which outpaced the expectations from December, while the downward revision over the remainder of the projection horizon is attributable to the lower growth projection for compensation per employee and the appreciation of the euro.

The current inflation projection for this year is 0.3 percentage points higher than in December, primarily on account of energy price inflation and other goods inflation, which have mostly surprised on the upside since the December projections were released (see Figure 2.3.1, right). The upward revision to energy price inflation still reflects the pricing of the main suppliers of electricity, gas and heat, and developments in prices on the Slovenian electricity exchange. This more than outweighs the changes in energy prices on global markets, where oil prices in particular have declined (significantly) since December (see Figure 2.3.2, left).

The inflation projection for next year remains unchanged from the December projections. The upward revision to food price inflation, largely in connection with the higher assumption for growth in wholesale prices of meat, and energy, which is attributable to a base effect caused by this year’s government measures and regulatory changes in the electricity sector, was offset by the downward revision to components of core inflation. These also account for the 0.2 percentage point downward revision of the inflation projection for 2027. The downward revision in the projection for other goods inflation is primarily attributable to the appreciation of the euro and the weaker economic activity in 2025 and 2026, while the reduction in service price inflation is attributable mainly to revisions to the growth projection for compensation per employee (see Figure 2.3.1, right) and to a lesser extent to the more pronounced seasonal patterns in package holidays evident in the post-pandemic period.

3Risks and Uncertainties

Risks to economic growth remain tilted to the downside over the entire projection horizon, whereas risks to inflation are more broadly balanced.

The main risk to economic growth remains the pronounced uncertainty associated with the situation in global trade. This relates primarily to the potential for further rises in tariffs after the end of the 90-day moratorium, which envisages a freeze in the 10% tariffs on US imports of goods from the EU between April and July 2025. The uncertainty surrounding trade policy and the economic outlook is also reflected in increased volatility on the financial markets. In the domestic environment, the risks primarily relate to adverse structural trends, which are increasingly having an impact on cyclical economic developments. Over the projection horizon, this primarily relates to a potential for structurally lower growth in labour productivity. The latter could deviate from its long-term trend on account of sluggish investment growth in the past, and adverse demographic trends. Conversely, GDP growth could exceed the baseline projections in the event of higher government defence spending in Slovenia and at EU level.

The adverse situation in international trade could also drive up import prices and increase backlogs in supply chains, which might temporarily raise inflation in the global environment. In the domestic environment, price and cost pressures might additionally be raised by lower productivity growth and the corresponding rise in unit labour costs, and by limits on the supply side of the economy. On the demand side, inflation might also be raised by increased defence spending in Slovenia and at EU level, which in the context of limited production capacity and a tight labour market would raise prices of intermediate goods and exert pressures on wage growth. A temporary rise in inflation compared with the baseline projection might also be caused by global supply shocks, whose occurrence has increased markedly over the last decade amid increasing geopolitical fragmentation and increasingly frequent weather shocks.

The risks to the inflation forecast for the horizon of 2025 to 2027 nevertheless remain mostly balanced, in that the realisation of major downside risks to economic growth via lower demand would drive a disinflationary effects in the external environment and domestically, particularly in the second half of the projection horizon.

The remainder of this section presents detailed scenario analysis of higher tariffs and trade uncertainty and a scenario of structurally lower growth in labour productivity. Furthermore, in the context of a potential rise in defence spending, Box 3.1 analyses Slovenia’s exposure to the spill-over effect in the event of simultaneous rises in government spending in EU Member States.

3.1Impact of higher tariffs and trade uncertainty in the baseline projection and in the severe scenario

The baseline macroeconomic projection is conditioned on the existing effects of protectionist policy and remains surrounded by elevated risks of a further deterioration. The baseline projection assumes that tariffs will remain unchanged relative to the cut-off date over the entire projection horizon. In the case of trade between the US and the EU, this would entail 10% tariffs on imports of goods into the US from the EU, and an absence of retaliatory measures on imports of goods into the EU from the US (see Table 3.1.1).

The existing tariffs in the baseline projection are accompanied by a gradual waning of uncertainty, observed by the global economic policy uncertainty (EPU) indicator, to its long-term average by the end of the first quarter of 2026 (see Figure 3.1.2, right). The severe scenario by contrast assumes 20% reciprocal tariffs on trade between the US and the EU from the third quarter of 2025 inclusive, while tariffs of 145% and 125% are applied to trade in goods between the US and China. Trade policy uncertainty wanes more slowly under the severe scenario, and stabilises at its average level from 2018 at the end of the projection horizon, which reflects a period of tighter trade policy during Donald Trump’s first term. Under the severe scenario, the higher tariffs and economic uncertainty are also accompanied by increased financial risks, which relate to a rise in credit spreads and higher interest rates on loans to non-financial corporations (see Figure 3.1.2).

Under the baseline projection, global trade tensions weigh mainly on 2025, primarily through heightened international uncertainty. In a severe scenario, adverse effects would intensify and extend more markedly across the remainder of the forecast horizon, reflecting a sharper decline in foreign demand, prolonged economic uncertainty, and potential financial amplification.

Figure 3.1.3 illustrates the effects of tariffs and the related uncertainty in the international economic environment under the baseline projection and the severe scenario. Compared with the December projections, the deterioration in global trade in 2025 reduces GDP growth by approximately 0.6 percentage points, primarily from the adverse impact of uncertainty on domestic investment activity. Conversely, given the Slovenian economy’s relatively small direct exposure to the US, the actual impact of the tariffs remains relatively limited. A slightly larger impact is expected from indirect exposure to tariffs via Slovenia’s main trading partners in the euro area, which in 2025 and 2026 reduces the GDP growth forecast by approximately 0.1 percentage points.

Compared with the baseline projection, the further deterioration in global trade envisaged under the severe scenario would additionally lower GDP growth by approximately 0.4 percentage points in 2025, 0.8 percentage points in 2026 and almost 0.4 percentage points in 2027. In 2025, the stronger impact would mainly come from a more pronounced decline in foreign demand and lower economic activity in the main trading partners, while the impact in 2026 would be deepened by persistent uncertainty in the international environment and less favourable financing conditions amid the rise in credit risk.

The adverse situation in global trade is expected to have a broadly disinflationary effect over the medium term.

Under the baseline projection the adverse effects on economic growth from tariffs and trade uncertainty gradually spill over into inflation. The inflation projection is therefore 0.2 percentage points lower in 2026 and 0.3 percentage points lower in 2027 than it would be in the absence of these factors (see Figure 3.1.4). Under the severe scenario the effects are even stronger, and would reduce inflation by an additional 0.6 percentage points by the end of projection horizon compared with the baseline projection. The stronger adverse effects in 2025 and 2026 relate primarily to dampened commodity prices on global markets, while the main factors at the end of the projection horizon are those reducing GDP growth at home and abroad. There are minor inflationary pressures under the severe scenario, which mainly reflect a temporary rise in import prices following the introduction of retaliatory tariffs on US goods, but these are limited from the perspective of the projection horizon and are overwhelmingly temporary in nature. The comparably higher tariffs on US imports of goods from China would be expected to lead to a net negative impact on inflation, as a result of the better terms of trade for European countries and the potential redirection of exports of Chinese goods to European markets. Here it should be emphasised that the scenario does not take account of any bottlenecks in supply chains that might make a significant contribution to inflationary pressures during the period in question.

3.2Risk of structurally lower productivity growth

The uncertainty in the economy is being accompanied by signs of cooling on the labour market. This is particularly evident in the private sector, where employment has been falling since the beginning of 2024. In the wake of these developments, total employment would be 0.5% lower this year than under the baseline projection, and would only partly recover in 2026 with growth of 0.2%. From the side of production factors, GDP growth over the projection horizon therefore depends significantly on the anticipated productivity growth. This will stand at 1.7% this year, before strengthening to 2.1% in 2026 and 1.9% in 2027. The increased growth will be driven by cyclical factors related to better utilisation of employees in the work process and greater alignment between the level of employment and economic activity than in the post-pandemic period.[57] The growth in labour productivity forecast over the projection horizon is mainly in line with its long-term average of 2.0% for the period of 1995 to 2024, but at the same time remains on average 0.6 percentage points higher than average growth over the pre-pandemic period (2010 to 2019). It also exceeds the projection for the euro area by approximately 1.3 percentage points. Adverse structural factors, such as low growth in investment and an ageing workforce in employment, pose a risk of lower trend growth in productivity over the projection horizon, and a stalling at levels below the long-term average.

Two alternative scenarios of lower growth in labour productivity than under the baseline projection are examined (see Figure 3.2.1, left). The moderate scenario envisages growth in labour productivity remaining at its level from 2024 of 1.4%, comparable to the average in the decade before the pandemic (2010 to 2019). The severe scenario envisages a decline in growth in labour productivity to below 1%, thus assuming gradual convergence to the average growth in the euro area. The right chart of Figure 3.2.1 illustrates the impact of the alternative productivity growth scenarios on GDP growth and inflation. Under both scenarios the impact on economic growth in the first year of the projection remains relatively limited, as the model envisage that firms would temporarily compensate for the lower productivity growth through additional hiring. However, the ability to do so gradually diminishes over the remainder of the projection horizon owing to the tightness of the labour market and the pressures on firms’ competitiveness. The largest impact on economic growth in the event of the realisation of risks would thus be expected in 2026, when growth would be approximately 0.7 percentage points lower under the moderate scenario, and 0.9 percentage points lower under the severe scenario. The lower economic growth would be accompanied by higher inflation. Compared with the baseline projection, it would be 0.6 percentage points higher at the end of the projection horizon under the moderate scenario, and 1 percentage point higher under the severe scenario. The inflationary pressures would reflect higher unit labour costs and opening of the output gap, which would come from the sharper fall in the economy’s production capacity relative to the fall in aggregate demand.

4Comparison Between Institutions

Banka Slovenije’s projections, which include data on GDP in the first quarter, project GDP growth on average over the 2025-2027 period to be 0.3 percentage point lower than the median of other institutions' projections, while the inflation projection is at the level of the median.

The latest economic growth projections for the 2025 to 2027 horizon show greater divergence in the projections between the institutions (see Figure 4.1, left). Similarly to Banka Slovenije, the institutions who prepared their projections close to the end of the first half of the year, and considered more monthly and quarterly SURS datasets, are expecting a slightly worse outlook, primarily on account of the increased uncertainty surrounding economic policy and the geopolitical situation in the international environment. Amid a gradual stabilisation, all the institutions are expecting economic growth of around 2.5% in the following years. The highest economic growth for 2025 of 2.5% comes from the CCI. It is followed by WIIW, the IMAD, Consensus and the European Commission, who are projecting growth of 2.2%, 2.1% and 2.0%, respectively. The EBRD, the IMF, the OECD and Banka Slovenije are the only institutions projecting growth of less than 2% this year, at 1.9%, 1.8%, 1.6% and 1.3%, respectively. The Banka Slovenije projection is 0.7 percentage points lower than the median of all projections for the current year.

The CCI also has the highest economic growth projection for next year, at 2.6% or 0.2 percentage points more than the median of all projections for that year. It is followed by Banka Slovenije, Consensus, the European Commission, the IMF, the OECD, the IMAD and WIIW, all with projections at the median level of 2.4%. The lowest GDP growth projection of 2.3% comes from the EBRD. Economic growth projections for 2027 are available by four institutions. The Banka Slovenije projection of 2.4% is at the median level of the available projections for that year.

After last year’s significant decline in consumer price inflation, all the institutions are projecting inflation in 2025 slightly above the ECB monetary policy target rate (see Figure 4.1, right). It will mainly be driven by services and food prices, while the expiry of certain government measures to regulate energy prices will also make a contribution to inflation. The institutions are expecting a gradual slowdown in inflation towards 2.0% towards the end of the projection horizon. The highest inflation projection for 2025 come from the IMF, the OECD, Banka Slovenije and the CCI, at 2.6% and 2.5%. Banka Slovenije’s projection is 0.1 percentage points above the median of all projections for the current year. Next come the projections of 2.3% and 2.2% by the IMAD, Consensus and WIIW, while the lowest consumer price inflation projection of 2.1% comes from the European Commission.

The highest inflation projection for next year of 2.5% comes from the CCI. It is followed by projections of 2.3% from the IMF, the OECD and the IMAD. The lowest consumer price inflation projections for next year are 2.0% from WIIW and 1.9% from the European Commission. The Banka Slovenije projection is 2.2%, 0.1 percentage points below the median of all projections for 2026. Consumer price inflation projections for 2027 are available from four institutions. The highest projection is 2.2% from the IMF, while the lowest is the Banka Slovenije projection of 1.9%.

5Statistical Appendix

6List of abbreviations