Summary

The US’s introduction of new tariffs has increased economic uncertainty. Industrial production in Slovenia is weakening, while there are also signs of a slowdown in consumption on the domestic market. Inflation remains close to 2%.

The euro area saw weak growth in the first quarter, which continued to be driven by services, according to the latest survey data. Despite a slight improvement in the composite PMI, the economic situation remained difficult and uncertain in March, particularly in connection with trade policy, which is also being reflected in a further decline in the economic sentiment. According to the ECB’s March projections, economic growth is forecast to strengthen slightly over the projection horizon, with the downside risks mainly related to geopolitical developments and rising tensions in international trade. Inflation in the euro area slowed slightly further in March. Headline inflation stood at 2.2%, while inflation excluding energy and food prices stood at 2.4%.

The ECB continued to loosen monetary policy in March, while most other major central banks held their policy rates steady after a series of earlier cuts. In March, the Eurosystem carried out its sixth reduction since the easing cycle began in June last year, lowering the deposit facility rate by 25 basis points to 2.50 %. Since the beginning of March, market expectations for the path of policy rates at both the ECB and the Fed have shifted toward quicker and larger cuts. According to current overnight index swap (OIS) rates, investors now expect roughly 75 basis points of additional easing at the ECB and the Fed this year.

Financial markets have experienced pronounced volatility since the start of March, driven by the escalating trade war and frequent shifts in US trade policy. Major US and European equity indices have declined as investors sought safer assets, sending gold to record highs. Amid growing expectations of faster and deeper interest rate cuts, yields on short-dated US and German government bonds have fallen slightly.

The domestic economy faces uncertainty, with considerable variation between sectors. The economic sentiment improved slightly in the first quarter, in the wake of relatively favourable assessments of final consumption by firms and strengthening construction activity as captured by survey. The year-on-year figures for construction work were also relatively favourable in January, and pointed to increased activity in almost all construction segments. The situation is worsening in manufacturing, where output over the first two months of the year was down in year-on-year terms. Export-oriented firms are continuing to face weak foreign demand according to the survey indicators. Real consumption indicators are also pointing to a slowdown. The value of card payments in the first quarter was up around 3% in year-on-year terms, the lowest increase in almost two years, while the value of invoices registered with tax authorities was down more than 1%. Albeit amid a wide range of forecasts, the nowcast is pointing to favourable economic growth in the first quarter for now, although there is considerable uncertainty surrounding the remainder of the year because of the imposition of various tariffs.

The labour market remains tight despite signs of a slowdown, which are primarily being seen in the private sector. The workforce in employment in January was down 0.3% in year-on-year terms. The decline was driven by employment in the private sector, most notably in manufacturing and at staffing agencies, while the workforce in employment in the public sector increased. Registered unemployment stood at 45,851 in March, down in year-on-year terms, taking the registered unemployment rate to 5.1% according to the latest data, an indication of the persistent tightness of the labour market amid positive expectations with regard to future hiring. Together with the implementation of a new wage system in the public sector, this is maintaining growth in the average wage at close to 7%.

Inflation rose slightly in March, driven by non-energy components of the consumer basket. Headline inflation, as measured by the HICP, reached 2.2%, up from 1.9% in February. Food inflation strengthened again, reflecting global market conditions and rising prices along production chains. Energy prices remained down in year-on-year terms, despite a monthly rise in electricity prices. Core inflation picked up to 2.5% (from 2.2% in February), with services inflation in particular remaining elevated, amid persistently strong growth in labour costs. In contrast, the growth rate of prices for other goods remained relatively subdued and in line with its long-term average.

The general government deficit and debt both declined as a ratio to GDP last year, but the uncertainty surrounding the public finances remains elevated. The general government deficit amounted to 0.9% of GDP last year. The decline was primarily attributable to the abolition of measures to mitigate high energy prices. The general government debt stood at 67.0% of GDP at the end of the year, up only slightly from its level in 2019. According to the consolidated general government data, the position deteriorated over the first two months of this year, in part as a result of a worsening position vis-à-vis the EU budget. Public finance developments remain subject to numerous risks: external risks posed by geopolitical (increased defence spending) and trade changes (tariffs), and domestic risks in connection with the preparation and implementation of various reforms (pensions, healthcare, long-term social care), increased interest expenditure, and the ongoing post-flood reconstruction. The general government deficit is set to rise to 1.9% of GDP this year according to government forecasts.

***

In light of the announcement of new tariffs by the US administration, this issue of the publication provides a detailed look at trading links and financial flows between Slovenia and the US. Although direct trade between the two economies is relatively small, the indirect effects of the imposition of tariffs might be more pronounced, given that Slovenia is a small, open economy. In addition to exposure via its main trading partners, higher tariffs will also affect the domestic economy in particular via increased trade uncertainty. For this reason we illustrate two measures that indicate that uncertainty has increased significantly in recent times. The December projections drew up the first estimates of the impact of reciprocal tariffs on the Slovenian economy, and in the June projections they will be updated to reflect the latest information. In light of the European Commission’s new plan for the future of defence in the EU, this issue also examines the features of firms included in Slovenia’s defence cluster, as there is an expectation that the coming years will see their role in the economy strengthen.

1International Environment

Growth in the global economy remained weak in the first quarter according to the survey data, with the announced tariffs and the increased uncertainty posing the main risk going forward.

The global composite PMI strengthened slightly to 52.1 points in March, having declined to 51.5 points in February (see Figure 1.1). The indicator’s average value over the first quarter was nevertheless at its lowest level since the first quarter of 2023. Growth in activity in services and in manufacturing continued to diverge in March. While the services indicator rose from 51.7 points in February to 52.7 points in March, the manufacturing indicator slid from 50.6 points to 50.3 points.

In early April, the new US administration announced the imposition of so-called reciprocal tariffs on merchandise imports to the US,[1] which are likely to drive a sharp rise in effective tariff rates following final enforcement.[2] Following retaliatory measures by China, the US raised its tariffs on imports of Chinese goods to 125%, taking the effective rate to 145% alongside the 20% rate previously announced. China’s tariffs on merchandise imports from the US now stand at 84%. The US imposed a 90-day freeze on the rise in reciprocal tariffs for other countries, to which a 10% tariff on imports into the US therefore applies. This does not apply to imports of cars, aluminium and steel, to which the 25% rates announced in February and March will continue to apply, irrespective of the origin of the imports. The EU has deferred the imposition of countermeasures to US tariffs on imports of steel and aluminium for 90 days.

The recently announced tariffs on merchandise imports to the US and the potential retaliatory measures could hit the already weak growth in global manufacturing activity, while the increased uncertainty accompanying the announcement of tariffs and retaliatory measures could threaten growth in activity in other sectors. Another indication of the wider impact of tariffs comes from the PMI for Canada, which was the subject of the announcement of additional tariffs by the new US administration even before the announcement of the new reciprocal tariffs on other trading partners. In March, Canada’s composite PMI fell to its lowest level since June 2020. In addition to the decline in the manufacturing indicator, driven in particular by a fall in the narrower new orders indicator, there was also a decline in the services indicator, which is indicative of the impact of tariff-related uncertainty on consumption.

There is not yet any sign of a major direct impact on the PMIs for other economies from the so-called reciprocal tariffs, as these were only announced after the final collection of the data for the indicators released in March. Of the advanced economies, it was the US that continued to record the strongest composite PMI in March (53.5 points), followed by the UK and the euro area (51.5 and 50.9 points respectively), while Japan slid into the zone of contraction (48.9 points). Meanwhile, India saw the highest composite PMI of the emerging economies (close to 60 points), while moderate growth was indicated for China and Brazil (with 51.8 and 52.6 points respectively), and a moderate contraction for Russia (49.1 points).

The survey indicators for the euro area point to a continuation of weak economic growth in the first quarter. The outlook is accompanied by considerable uncertainty stemming from geopolitical developments and changes in economic policy.

Economic activity in the euro area increased by 0.2% in the final quarter of last year, driven primarily by domestic demand. Alongside household consumption, which accounted for 0.2 percentage points, gross fixed capital formation and government spending each contributed 0.1 percentage points to GDP growth, while the contribution by the change in inventories was negative in the amount of 0.2 percentage points. On the output side, services remained the main factor of growth, while activity in industry was down slightly in year-on-year terms, which was consistent with the monthly indicators of economic activity at the end of the year.

The composite PMI averaged 50.4 points over the first quarter, which was indicative of a continuation of weak economic growth. The composite PMI hit 50.9 points in March (up 0.7 points), amid an improvement in the services and manufacturing indicators (see Figure 1.2, left). While the manufacturing PMI remains in the zone of contraction at 48.6 points (up 1.0 points), the output component moved into the zone of expansion for the first time in two years. The recovery in manufacturing was most pronounced in Germany and France, which might only be temporary, and – in the wake of the smallest decline in new foreign orders since April 2022 – at least partly attributable to the early ordering of products from the US before the imposition of tariffs. According to the services PMI, growth in activity strengthened moderately after slowing for two months, although new orders fell slightly for the second consecutive month.

Stronger hiring in the service sector coincided with a decline in lay-offs in manufacturing. This has been reflected in a continued decline in the unemployment rate in the euro area, which hit a new record low of 6.1% in February. The survey data suggests that hiring will slow over the next three months: in March the employment expectations indicator hit its lowest level in four years.

Despite the improvement in the majority of the PMIs, the economic situation remains uncertain, which is also reflected in a decline in the European Commission’s economic sentiment indicators in all sectors other than industry (see Figure 1.2, right). The slight improvement in the outlook for the latter was at least partly attributable to the extensive fiscal reforms announced in Germany in connection with defence and infrastructure.

According to the ECB’s March projections, the euro area economy will expand by 0.9% this year, before growth strengthens to 1.2% and 1.3% over the next two years. Compared with the Eurosystem projections from last December, the economic growth forecasts for this year and next year have been revised downwards by 0.2 percentage points, while the forecast for 2027 remains unchanged. The weaker outlook is mainly attributable to the persistent uncertainty surrounding geopolitical developments and trade policy, and the challenges in the area of competitiveness.

The slowdown in euro area inflation was primarily driven by services prices, as cost pressures eased.

Euro area headline inflation, as measured by the HICP, is continuing to slow. It fell to 2.2% in March, down from 2.3% in February (see Figure 1.3, left). The slowdown was mainly attributable to developments in services and energy prices, while the contribution from food prices strengthened slightly. This year’s rising food inflation, which reached 2.9% in March,[3] is being driven by unprocessed food prices, and mostly reflects base effects caused by last year’s price volatility, as well as relatively large month-on-month increases amid adverse weather conditions. As a result, cost pressures from commodity markets are being passed through to rising import and producer prices (see Figure 1.3, right). Growth in processed food prices has remained stable at 2.6% since the beginning of the year, even when excluding tobacco prices. Energy prices were down 0.7% year-on-year, and 1.2% in month-on-month, primarily due to lower fuel prices, supported by the euro's appreciation against the US dollar.

Core inflation, i.e. inflation excluding energy and food prices, slowed to 2.4% in March (down from 2.6% in February), entirely as a result of a smaller contribution from services prices. Services inflation slowed to 3.4% (down from 3.7% in February), reflecting an ongoing decline in real labour costs growth, as well as developments in profit margins, which continue to ease domestic price pressures. According to the ECB indicators,[4] labour market conditions eased in the first quarter, despite the solid growth in services activity. By contrast, price pressures in manufacturing have been modest for some time (see Figure 1.3, right). Amid weaker demand, this is being reflected in the growth of prices for non-energy industrial goods (hereinafter: other goods), which remained unchanged from February at 0.6% and is in line with its pre-pandemic level.

In March, domestic headline and core inflation were almost matching their corresponding rates in the euro area. Inflation differentials across euro area countries have remained relatively small and stable since the beginning of last year.[5] The lowest inflation rate of 0.9% was recorded in France, while the highest rate of 4.3% was observed in Estonia, Slovakia and Croatia, driven primarily by elevated services inflation.[6]

2Monetary Policy and Financial Markets

In March, the Eurosystem lowered the deposit facility rate by 25 basis points to 2.50 %, whereas the Federal Reserve kept its policy rate unchanged.

In March, the Eurosystem cut all three of its key interest rates for the sixth time since the cycle of monetary policy easing began in June of last year, by 25 basis points. This reduced the interest rates on the deposit facility to 2.50%, on main refinancing operations to 2.65% and on the marginal lending facility to 2.90%. The decision to cut rates was based on an updated assessment of the inflation outlook, the developments in core inflation, and the intensity of monetary policy transmission. The disinflation process is proceeding in line with expectations, with the majority of indicators currently suggesting that inflation will stabilize sustainably at a level around the Governing Council’s 2% target rate.

At its March meeting, and amid increased inflation risks, the Fed left its key interest rate unchanged in the corridor between 4.25% and 4.50%. Significant uncertainty still surrounds the economic impact of US trade policy, so any decision to ease policy will require additional data. The Fed estimates that higher tariffs should affect inflation only temporarily; meanwhile, recession risk in the United States is rising, though it remains relatively low. Key interest rates were also left unchanged by the central banks in the UK (4.50%), Sweden (2.25%) and Japan (0.50%), while the central banks of Switzerland and Canada cut their key interest rates by 25 basis points (to 0.25% and 2.75% respectively).

Since early March, market expectations for the path of ECB and Fed policy rates have shifted toward faster and larger cuts. The change reflects increasing concerns that US trade policy could have a lasting impact on both the US and European economies. Overnight index swap (OIS) prices now imply three additional 25-basis-point reductions by the ECB this year, which would lower the deposit facility rate to 1.75 % (see Figure 2.1, left). Markets likewise anticipate three Fed cuts in 2025, bringing the federal funds target range down to 3.50 %–3.75 %.

Since the start of March, major global equity indices have declined as investors shifted into safer assets, pushing gold to record highs. Meanwhile, yields on U.S. and German government bonds have moved in opposite directions.

Amid growing expectations that the Fed and the ECB will deliver faster and deeper rate cuts this year, yields on short-dated U.S. Treasuries have fallen by 10 basis points since early March, while equivalent German yields have slipped by 12 basis points. The move reflects mounting concern about the trade war’s negative impact on US and European growth and the accompanying prospect of additional monetary easing. By contrast, yields on US long-term government bonds have risen by 12 basis points since the early March as investors retreat from these bonds amid the volatile US trade policy. This was driven by early-April announcements of extensive US tariffs on their trading partners, and a subsequent 90-day deferral of said tariffs (apart from China) above the 10% minimum rate. Yields on German long-term government bonds have risen by 28 basis points since the beginning of March, driven primarily by the announcement of increases in defense and infrastructure spending in Germany. The spreads between yields on euro area bonds with higher credit risk and the German benchmark government bonds have widened during this period as the appetite for safer asset classes has strengthened.

Amid heightened uncertainty over US trade policy, major US and European equity benchmarks have retreated in recent weeks. The largest decrease came in early April, following the announcement of tariffs by the US administration. The leading European index (STOXX Europe 600) reached a record high in early March following the announcement of an increase in defense and infrastructure spending by Germany, but has since fallen by 11.4% amid an escalating trade war. Similarly, the leading US index (S&P 500) has lost 8.4% since the beginning of March, while the Magnificent Seven index, consisting of leading US tech firms (see Figure 2.1, right), has fallen 9.6%. In Hong Kong, the Hang Seng index reached a record high in the second half of March, as a result of investor optimism surrounding the technological advances made by Chinese firms, but it now stands 16.1% below that peak.

Following Germany’s announcement of higher defense and infrastructure spending—and amid mounting concern that the escalating trade war could weigh on the U.S. economy—the euro strengthened sharply against the U.S. dollar in early March. Since the start of March, the euro has appreciated 6.0 % versus the dollar, while the dollar index has fallen 4.5 % against a basket of major currencies. Brent crude is down 11.5 % over the same period as fears of weaker global demand weigh on oil prices. Gold, benefiting from the flight to safety, has climbed 9.1 % and now trades just below its early-April record (USD 3,167 per ounce).

3Domestic Economic Activity

The economic climate improved a little in the first quarter of this year, as confidence rose in private-sector services and construction.

The economic sentiment indicator stood at -1.6 percentage points in March, up 1.0 percentage points on January (see Figure 3.1, left). An improvement in confidence in the first quarter was evident in retail, where firms’ March assessments of current and expected demand were optimistic. There was also a notable improvement in construction, with the order books and activity indicators rising. The survey assessments of solid performance in the domestic market in the first quarter are confirmed by the confidence indicator in other private-sector services, which remained relatively high and stable for now.

In contrast to firms in retail and other private-sector services, consumers remain relatively pessimistic. The consumer confidence indicator remains at low levels, amid monthly fluctuations (see Figure 3.1, right). Expectations of a renewed rise in inflation have strengthened in recent months, while there are also concerns with regard to the future economic situation and a rise in unemployment. Conversely there is a positive assessment of their current financial situation, which in March was 5.0 percentage points higher than its average between 2010 and 2024.

Confidence among manufacturing firms remains low, without any significant changes at monthly level. Survey assessments of current output are close to stagnation, while the indicator of expected output in the first quarter was down on the final quarter of last year, and the assessment of current demand was only insignificantly higher. Assessments of export expectations rose to a lesser degree in March, but only back to their level from December.

The available activity indicators for the first quarter point to a slowdown in consumption on the domestic market, and weaker manufacturing output, but also to a solid construction output in January.

The indicators of consumption on the domestic market available for the first quarter are less favourable than the survey results. Aggregate year-on-year growth in turnover (real income) in private-sector services stood at just 0.3% in January, with the increase largely being driven by relatively strong sales in retail (see Figure 3.2, left). Aggregate turnover in other private-sector services was down 1.6%, with a decline of 16.2% recorded by real estate activities, which confirms the crunch in the housing market.

According to the real year-on-year changes in the aggregate value of card payments and ATM withdrawals and in the aggregate value of invoices registered with tax authorities, consumption slowed significantly in the first quarter. Year-on-year growth in the first stood at 3%, the lowest figure since the second quarter of 2023, while the second was down more than 1%, the first fall since the second quarter of last year (see Figure 3.2, right).[7]

In addition to the survey data, further indication of the difficult situation in manufacturing comes from the output indices. Output in February was down 1.6% on last December, while output over the first two months of this year was down 0.7% in year-on-year terms (see Figure 3.2, left). In terms of technological complexity, high-tech manufacturing was alone in seeing a year-on-year increase in output over the first two months of the year, in the amount of 5.0%. With output declining sharply in the manufacture of computer, electronic and optical equipment, and to an even greater extent in the manufacture of other transport equipment, the growth in this segment was thought to be based solely on the pharmaceutical industry.[8]

There remain major differences between individual segments of manufacturing. Output over the first two months of the year was down in year-on-year terms in nine segments, and up in 12, with the changes ranging from -38.9% to 5.4%. The varying developments inside manufacturing are analysed in detail in Selected Theme 8.1.

Despite weak monthly dynamics, construction activity in January recorded its first year-on-year increase since February of last year, while the breakdown of activity points to a general improvement in the situation in the sector. The aggregate amount of construction put in place was up 3.8% in year-on-year terms (see Figure 3.2, left), with strong increases in almost all segments, including residential construction. The only sluggish performance was in civil engineering work, where the initial figures from this year for government construction investment are perhaps already suggesting a reversal. Potential demand for the construction of buildings also strengthened somewhat in January and February: the number of issued building permits and corresponding floorspace were up slightly on a year earlier.

The situation in the housing market remains difficult, particularly on the supply side. Year-on-year growth in prices stood at 8.5% in the final quarter of last year, the highest figure since the first quarter of 2023, but the number of transactions again fell. Residential construction costs continued to grow, but the rate of 3.9% was considerably outpaced by growth in prices.

The high-frequency indicators point to a significant increase in uncertainty also in the domestic economy following the imposition of tariffs by the new US administration.

Conventional data that could measure the impact of the US’s new trade policy is not yet available. The non-standard data points to an increase in uncertainty in Slovenia, which is examined in detail in Box 3.2. The first economic sentiment data following the rise in tensions in international trade will be available at the end of April, and will also be captured by the nowcasts at that time.

4Labour Market

The number of persons in employment in January was down in year-on-year terms for the second consecutive month.

After a sharp decline in December,[21] the number of persons in employment stood at 936,483 in January, down 0.3% on a year earlier. The number of persons in employment was down in the private sector (by 0.9%), but up in the public sector (by 1.9%; see Figure 4.1, left).[22] The largest year-on-year falls in absolute terms were in manufacturing, and in administrative and support service activities. The latter saw a particularly sharp fall in employment activities, which include staffing agencies. For the first time since December 2020, there were also fewer persons in employment in construction year-on-year.

The survey data for employment expectations improved in March. After three consecutive months in negative territory according to the seasonally adjusted data, employment expectations in manufacturing turned positive again in March (see Figure 4.1, right). They also improved in services and construction, where they remain above their long-term averages. Labour shortages also remain above their long-term averages despite the slowdown in hiring, with firms continuing to address them by hiring foreign nationals. The contribution to the change in the number of persons in employment made by foreign nationals thus remained positive in January. More than three-quarters of foreign nationals in the number of persons in employment come from the countries of the western Balkans, most notably Bosnia and Herzegovina, while the largest rises over the last year were in the numbers coming from Nepal, the Philippines and Bangladesh (see Figure 4.2, left). Employers continue to have demand for low-skilled jobs in particular.

The year-on-year fall in registered unemployment is continuing: it stood at 45,851 in March, down 2.2% on the same month last year (see Figure 4.1, left). Inflows into and outflows from unemployment over the first three months of this year were both down in year-on-year terms. The decline in the former was primarily driven by the expiry of temporary employment contracts, while the decline in the latter was driven by new hires. The registered unemployment rate stood at 5.1% in January, down 0.1 percentage points in year-on-year terms.

The introduction of a new wage system meant that year-on-year growth in the average gross wage in January was twice as high in the public sector than in the private sector.

The average gross wage per employee in January was up 6.9% in year-on-year terms, 0.6 percentage points more than last year’s average rate. A major factor in this wage growth was the introduction of a new wage system in the public sector: year-on-year growth in the average gross wage in the public sector stood at 10.2%, 5.6 percentage points higher than last year’s average rate (see Figure 4.2, right). Year-on-year growth in the private sector was significantly lower by contrast at 5.0%, and was down on last year’s average rate (by 2.1 percentage points). In January the minimum wage was adjusted to EUR 1,277.72 in line with last year’s inflation, up 1.9% on last year. Real year-on-year growth in the average gross wage stood at 4.4% in January, comparable to last year’s average.

5Current Account

Despite the uncertainties in the international environment, foreign trade continued to record moderate year-on-year growth over the first two months of the year.

According to the balance of payments figures, exports of merchandise and services over the first two months of the year were up approximately 2% in year-on-year terms, similar to the rate at the end of last year. Meanwhile growth in imports of merchandise and services strengthened from 2.6% to 3.2% (see Figure 5.1, left).

Nominal merchandise exports over the first two months of the year were up 1.8% in year-on-year terms, driven by the ongoing strength of energy exports, which were up 13.5%. Exports of machinery and equipment by contrast contracted for the fourth consecutive month (by 8.2%). Exports of road vehicles were down almost 12%, the largest fall since June 2022. Driven by energy exports in particular, exports to Austria increased (by 6.5%), while exports to France fell by almost 15% as a result of a decline in exports of road vehicles. Exports to Italy were also down (by 4.8%), exports to Germany stagnated (up 0.8%), and exports to Croatia increased by approximately 4%.

Year-on-year growth in nominal merchandise imports over the first two months of the year remained at its level from the final quarter of last year, at 2.4%. Imports of almost all categories of merchandise declined, most notably chemical products (down 5.7%)[23] and machinery and equipment (down 3.3%). Owing to a decline in imports of road vehicles and energy, and the high base from last year, there was a decline in imports from France (of 15.3%), while imports from Italy also declined slightly (by 1.7%). Conversely, imports from Croatia and Austria increased by just over 20% and 7% respectively, primarily due to energy imports, while a rise in road vehicles imports contributed to a 10% increase in imports from Germany.

The good performance in services trade seen in the second half of last year slowed over the first two months of this year. Nominal services exports were up 2.5% in year-on-year terms, driven by a rise of 9.6% in exports of transport services, while exports of construction services have undergone a continual decline since March of last year (they were down 23.1% over the first two months of this year). Services exports to France are up 20% in year-on-year terms this year, driven primarily by transport services, while services exports to the four other main trading partners (Germany, Austria, Italy and Croatia) declined.

Year-on-year growth in services imports picked up to 8.0% in the early part of this year, driven mainly by transport services, which rose by 16.6% year-on-year. Imports of construction services by contrast resumed their sharp year-on-year decline (of 22.9%), after temporarily improving at the end of last year. Services imports from Italy (mainly travel services) were up 7.5%, while imports from Croatia, Austria and France remained almost unchanged from the same period last year. Meanwhile, services imports from Germany declined by 6.5% (driven by construction and miscellaneous business services).

The 12-month current account surplus declined slightly to EUR 2.8 billion, approximately EUR 350 million lower than its one-year peak in October of last year (see Figure 5.1, right). The services trade surplus remained high at EUR 3.6 billion, while the merchandise trade surplus declined slightly to EUR 550 million. The decrease in the current account surplus was also driven by an increased deficit in income. This was primarily due to a EUR 240 million larger deficit in secondary income, as a result of various current general government transfers, while the deficit in primary income remains relatively unchanged.

6Inflation

March’s uptick in inflation was driven primarily by non-energy components of the consumer basket.

Headline inflation, as measured by the HICP, strengthened to 2.2% in March, up from 1.9% in February (see Figure 6.1, left). The increase was driven almost evenly by rising prices of food, non-energy industrial goods (hereinafter: other goods) and services. Food inflation[39] rose to 3.3% year-on-year (up from 2.8% in February) amid growth in food commodity prices on global markets having strengthened to 34.7% in January – only slightly below its previous peak in March 2022.[40] Such developments likely stem from numerous factors, particularly adverse weather conditions and geopolitical uncertainty. Notable increases were recorded in cocoa and coffee prices; however, pressures on global markets are, for now, only partially being passed through along production chains to consumer prices (see Figure 6.1, right). Since January, 0.4 percentage points of food inflation have been attributed to the increase in the tax on sugar-sweetened beverages, although this effect will fade out by next January.

Energy prices in March were down 1.6% year-on-year (compared to 1.7% in February). However, this small change in the annual growth rate masks significant differences in monthly trends across energy subcomponents. The rise of 16.5% in electricity prices – largely due to the expiry of government regulation on retailer prices and network charges for the highest-priced consumption block – was nearly offset by a 1.5% month-on-month decline in fuel prices. This decline reflects expectations of increased production by OPEC+ countries and concerns about weakening demand following the introduction of new tariffs in the US.

Core inflation has relatively aligned with headline inflation trends this year, despite persistent gap between services and other goods inflation.

Core inflation, i.e. inflation excluding energy and food prices, rose to 2.5% in March, up from 2.2% in February. Services inflation stood at 4.2% (up from 3.9% in February), with medical services[41] prices rising by 5.2% month-on-month (see Figure 6.2, left). High services inflation is also being driven by catering services,[42] which were up 5.4% year-on-year.

Cost pressures remained elevated, with real growth in compensation per employee exceeding 3% also towards the end of last year. However, services producer prices are no longer declining year-on-year, and firms are no longer expecting changes regarding demand and selling prices. These developments are not yet reflecting weaker consumption, as suggested by available indicators for domestic market turnover, or a moderate decline in capacity utilisation in the first quarter of this year.

Nevertheless, this could be reflected in the inflation for other goods, which remains relatively subdued, although it picked up to 0.5% in March (from 0.2% in February). The increase was attributable to month-on-month price rises in clothing and footwear amid the changeover to spring and summer collections. Unlike last year, however, these increases were more in line with the long-term average.[43] Among other subcategories, low inflation for other goods is largely driven by developments in prices of second-hand cars, while prices of items such as new cars and furniture are continuing to rise moderately (see Figure 6.2, right).

7Fiscal Position

The general government position reached a primary surplus last year as extraordinary measures were downsized, while the ratio of debt to GDP declined, largely as a result of GDP growth.

The general government deficit narrowed by EUR 1.0 billion last year to stand at 0.9% of GDP. It was 1.7 GDP percentage points smaller than in the previous year, and has narrowed significantly compared to the release of the October government projections (by 2.9%). The main improvement was in the central government position. The social security funds were in surplus in the amount of 0.2% of GDP, while local government recorded a deficit of 0.4% of GDP.[44] Amid an increase in interest expenditure, which reached 1.3% of GDP, a primary surplus was achieved for the first time since 2019, in the amount of 0.4% of GDP. The government plans are forecasting a rise in the general government deficit to 1.9% of GDP this year.

General government revenues increased by 9.4%, double the rate of GDP growth. There was notably high growth of 13.7% in social security contributions, driven by a labour market situation that was favourable to the public finances and the change of voluntary health insurance into compulsory health contribution, which accounts for almost half of the increase in social security contributions. Together with the lack of change in the income tax brackets, the situation on the labour market was also a factor in the high growth of approximately 10% in personal income tax revenues. Revenues from indirect taxes, which include VAT and excise duties, grew more modestly, but nevertheless increased by more than household consumption. This is attributable to the rise in excise duties on motor fuels and tobacco, a rise in environmental levies in the form of carbon tax, and a base effect in connection with the temporary taxation of energy at a lower rate between September 2022 and May 2023. Corporate income tax revenues were also up approximately a fifth on the previous year according to the SURS estimates, as a result of a temporary rise in the tax rate of 3 percentage points for a period of five years. The rise in interest rates was reflected in growth in interest income (see Figure 7.1, left).

The increase in general government expenditure was smaller than that in revenues, at 5.4%. The main factors in the nominal growth were social benefits, most notably pensions after an 8.8% pension increase and a rise in the number of pensioners, and wages. The expiry of the measures to mitigate the energy crisis was reflected in a decline in subsidies of more than a third. Government investment also declined after the previous EU financial framework ended. Interest payments rose again last year, as a result of an increase in debt and a rise in borrowing costs (see Figure 7.1, right).

The general government debt increased by EUR 1.2 billion in absolute terms last year to reach EUR 44.9 billion by year-end, or 67.0% of GDP (see Figure 7.2, left). Its ongoing decline as a ratio to GDP was primarily attributable to the increase in GDP, and to a lesser extent to the primary surplus (see Figure 7.2, right). The implicit interest rate on the debt rose to 2.0% last year (up from 1.9% in the previous year).[45]

The weighted coupon rate of government borrowing via bonds in the first quarter of this year (3.25%) was up slightly on last year (3.01%), while the yield on borrowing via treasury bills fell. The government’s largest borrowing came via the issuance of 30-year bonds, while a second people’s bond was issued in March with a nominal value of EUR 250 million, i.e. similar to the first issuance in February of last year.

The deterioration in the consolidated general government position over the first two months of this year was partly attributable to less favourable flows with the EU budget.

The consolidated general government deficit over the first two months of the year amounted to EUR 17 million, compared with a surplus of EUR 220 million in the same period last year. Almost half of the deterioration can be ascribed to the deterioration in the position vis-à-vis the EU budget, largely as a result of a decline in revenues. The state budget data for March shows a year-on-year narrowing in the deficit, despite a significant rise in interest payments. Last year civil servants unusually received their annual leave allowance in March, while the available data for this year indicates that subsidies and investment expenditure were also down in March of this year.

There remains great uncertainty in the fiscal area. The post-flood reconstruction is still in progress, but the measures to mitigate high energy prices are ending. The change in the geopolitical situation means that a rise in defence spending is necessary.[46] [47] Slovenia is one of the countries that spends the least on defence. Under the current plans it is likely to meet NATO target of 2% of GDP by 2030, but the expectation is that NATO will raise this target level. A new Fiscal Rule Act was passed in March, which adjusts the domestic fiscal rules to the changes at EU level. This transposed the caps on the budget deficit (3% of GDP) and on general government debt (60% of GDP) that cannot be exceeded over the medium term into the national legislative framework. The procedures that the government has to follow in the event of deviating from the rules have also been modified. There has been progress in structural reforms as social partners approved the pension reform in early April, and parliament passed a new healthcare law.

8Selected Themes

8.1Differences in activity between sectors of Slovenian manufacturing

The overall position of Slovenian manufacturing is relatively favourable compared with the euro area overall, and given the difficult circumstances of recent years. A detailed look at activity across individual sectors reveals that a number of them have faced declining output for some time now, while others are achieving high growth. An increase in activity is particularly evident in high-technology sectors, predominantly the pharmaceutical industry.[48] Value-added in high-technology sectors in 2023 was up more than 130% on 2008, compared with an increase of just 14.5% in other sectors combined. This predominance continued last year. Other manufacturing and the repair and installation of machinery and equipment are also recording high growth. Over the long term there has been a decline in output in low-technology sectors, including leather and related products, wearing apparel, paper and paper products, textiles, and wood and wood products. Output is also continuing to decline in the manufacturing of motor vehicles.

In difficult circumstances the overall performance of Slovenian manufacturing was evidently superior to that of the euro area and the EU.

Value-added rose by 2.8% last year in Slovenian manufacturing according to seasonally and calendar-adjusted data, but was down 1.7% in the euro area overall and 1.1% across the EU. Compared with 2019, i.e. before the pandemic, value-added in Slovenian manufacturing was up 7.2%, 4.5 percentage points and 3.5 percentage points more respectively than in the euro area and EU overall.

Slovenia also has the advantage over the long term: value-added in 2024 was up 32.2% on 2008, i.e. before the global economic recession, 17.3 percentage points and 13.7 percentage points more respectively than in the euro area and the EU overall (see Figure 8.1.1). Despite this, the situation varies significantly across individual domestic manufacturing sectors with evident structural changes.

Value-added is concentrated in high-technology sectors.

In 2023, the most recent year for which data on value-added is available for individual sectors, aggregate value-added in manufacturing rose by 1.3%. That year was marked by an energy crisis and huge uncertainty in international trade. Growth in value-added is roughly estimated at 3.4% in high-technology sectors, compared with just 0.8% in the remaining sectors of manufacturing (see Figure 8.1.2). According to the monthly indices, the situation remained similar last year: aggregate output in manufacturing increased by 1.2%, while output in high-technology sectors was up 2.4%.

High-technology sectors were the key factor in the increase in value-added in manufacturing compared with 2019. Aggregate value-added in 2023 was up 4.2% on the aforementioned year. It increased by 45.8% in high-technology sectors, but declined by 3.5% in the remaining manufacturing sectors. Value-added remained unchanged in medium-low technology sectors, whereas the decline exceeded 6.5% in medium-high and low-technology sectors (see Figure 8.1.2).

The rise of high-technology sectors has been long, and is the main reason that Slovenia outperforms average growth in value-added in the euro area and the EU. Aggregate value-added in manufacturing in 2023 was up 28.7% on 2008. It was up 132.1% in high-technology sectors, 19.0% in medium-high technology sectors, and 22.1% in medium-low technology sectors, but declined by 14.8% in low-technology sectors (see Figure 8.1.2). Excluding high-technology sectors, the increase in value-added in manufacturing would be 14.5%, roughly within the bounds of average growth in the euro area.

The share of aggregate real value-added in manufacturing accounted for by high-technology sectors is increasing rapidly.

The share of aggregate real value-added in manufacturing accounted for by high-technology sectors was roughly estimated at 21.7% in 2023, up 6.2 percentage points on 2019 and 9.6 percentage points on 2008. According to the latest data, the manufacture of basic pharmaceutical products and pharmaceutical preparations is to the fore, accounting for 16.8%, but the manufacture of computer, electronic and optical equipment has also grown in importance, its share rising to 4.8%. A declining share by contrast is most evident in low-technology sectors (see Figure 8.1.3).[49]

The situation varies sharply between sectors: there are large differences between them in growth in value-added, while the differences in growth in output continued last year.

Comparing value-added in manufacturing in 2023 with that in 2008, eleven sectors have seen an increase over this period, and eleven have seen a decline.[50] Even greater differences between sectors are discernible in the percentage changes, which range from -70.4% to 148.8% (see Figure 8.1.4). Manufacturing sectors can be arbitrarily divided into three groups in the long-term comparison: those with high growth, those close to stagnation, and those with a large decline. There are major differences even inside these groups.

The increase in value-added in the sectors with high growth ranges from 17.8% to 148.8%. The sectors with growth of more than 100% include other manufacturing, the manufacture of basic pharmaceutical products and pharmaceutical preparations, the repair and installation of machinery and equipment, and the manufacture of computer, electronic and optical products. The share of aggregate real value-added in manufacturing that they account for increased by 12.9 percentage points over the observation period to stand at 28.9%. Their aggregate value-added increased by 132.3%, and without their contribution the increase in value-added in manufacturing would be 19.8 percentage points lower at 8.9%.

The change in value-added between 2008 and 2023 in the group of sectors arbitrarily classed as close to stagnation ranges from -6.9% to 4.5%. They include the manufacture of beverages, non-metallic mineral products, furniture, chemicals and chemical products, basic metals, and rubber and plastic products, and printing.

The change in value-added in the sectors with a large decline ranges from -70.4% to
-13.1%. These sectors include the manufacture of leather and related products, wearing apparel, paper and paper products, textiles, motor vehicles, trailers and semi-trailers, and wood and wood products. The share of aggregate real value-added in manufacturing that they account for declined by 10.0 percentage points over the observation period to stand at 10.9%. Their aggregate value-added declined by 28.4%, and without their contribution the increase in value-added in manufacturing would be 13.7 percentage points higher at 42.4%. With the exception of the manufacture of motor vehicles, they are low-technology sectors.

Recent years have seen the pandemic, the energy crisis and a sharp downturn in international relations, but performance has nevertheless varied hugely across different sectors. The change in value-added between 2019 and 2023 ranges from -48.9% to 116.9% (see Figure 8.1.4). The largest declines came in the manufacture of paper and paper products, leather and related products, motor vehicles, trailers and semi-trailers, basic metals, food products, wood and wood products, and chemicals and chemical products. Conversely, there were large increases in value-added in the manufacture of textiles, furniture, basic pharmaceutical products and pharmaceutical preparations, computer, electronic and optical products, and other transport equipment, and other manufacturing.

The monthly indices for last year show an increase in output in nine of the 21 sectors for which data is available, with the annual changes ranging from -17.5% to 31.1% (see Figure 8.1.5).[51] There is no standard sample. Compared with the changes in value-added between 2019 and 2023, activity continued to decline in the manufacture of food products, wood and wood products, motor vehicles, trailers and semi-trailers, beverages, and leather and related products. The decline came to an end in the manufacture of wearing apparel, basic metals, electrical equipment, chemicals and chemical products, and paper and paper products. A downward reversal was seen in the manufacture of machinery and equipment n.e.c., other transport equipment, computer, electronic and optical products, textiles, non-metallic mineral products and furniture, and in the repair and installation of machinery and equipment.[52]

8.2Impact of financial structure on monetary policy transmission: comparison between Slovenia and the euro area

Financial structure, which encompasses the composition of the financing of non-financial corporations and households, such as debt and equity, can play an important role in monetary policy’s impact on economic activity and inflation. Differences in financial structure lead to different responsiveness of the economy to changes in interest rates, and the general effectiveness of monetary policy. This selected theme examines the role of financial structure in monetary policy transmission, with a focus on the differences between the euro area and Slovenia. By comparing patterns of financing in the euro area and Slovenia over the last 20 years, analysis explores how the structural differences affect the transmission of monetary policy and its potential economic consequences. The results show that during the last cycle of tightening in 2022 and 2023, monetary policy had a smaller impact on GDP and inflation via the saving and lending channels than in the cycle of 2005 to 2008, and that the impact in Slovenia was even weaker owing to the larger decline in loan financing.

Non-financial corporations, particularly in Slovenia, are less and less dependent on bank financing.

One of the key changes in the financial structure of non-financial corporations (NFCs) over the last decade is the diminishing dependence on loan financing, a trend that is particularly pronounced in Slovenia (see Figure 8.2.1). In the euro area equity traditionally played an important role in the financing of NFCs even before the global financial and economic crisis. In Slovenia by contrast, the shift towards equity financing (as opposed to debt) mainly took place after the crisis. This shift reflects the broader structural change in the financing of Slovenian NFCs, characterized by reduced dependence on debt financing, bank loans in particular. In comparison the euro area displayed a more stable financial structure, with a trend of increase in aggregate financial liabilities, whether debt or equity.[53]

Households in Slovenia are less indebted than those in the euro area, but hold a lower share of financial assets, including deposits.

The differences in the household sector reflect the varying patterns of saving and investing, and the more conservative approach to borrowing taken by Slovenian households.[54] While the ratio of household loans to GDP has been declining in recent years in Slovenia and in the euro area, the decline was less pronounced in Slovenia, where household borrowing remains relatively stable despite the general economic changes (see Figure 8.2.1, right).

The impact of financial structure on the effectiveness of monetary policy is assessed by means of local projections.

Following the approach taken by Jordà (2005),[55] the impulse responses of GDP and inflation (HICP) to a monetary shock are estimated using the following model:

where the left-hand side of the equation represents log-difference of the dependent variable of interest, which is either GDP or the HICP index across EA countries. MP represents the monetary policy shock, while the interaction term MP*z captures the heterogeneity in monetary policy transmission conditional on the value of the financial structure indicator (z).[56] The marginal effect of monetary policy is given as the sum of the coefficient β and the product θ*z, and shows how the monetary policy shock affects GDP and inflation (HICP) depending on the value of the financial structure indicator. The sample covers the period from the final quarter of 2003 to the third quarter of 2024, and includes all euro area countries other than Croatia and Estonia.[57] A number of financial structure indicators were tested in assessments, but the presentation of the results focuses on two key categories on the side of financial assets and liabilities: household deposits and loans to non-financial corporations.[58]

The monetary policy shock has a stronger impact on GDP and inflation when lending to non-financial corporations is high.

In line with expectations, a restrictive monetary policy shock leads to a negative response in GDP and inflation, where the size of the response depends on the level of financial indicators. The contraction effect is stronger when the flow of loans to NFCs expressed as a ratio to GDP is larger, which shows that economies with higher credit activity are more sensitive to changes in interest rates (see Figure 8.2.2, left). Conversely a higher level of household deposits causes a weaker response in GDP and inflation to monetary policy tightening (see Figure 8.2.2, right), which reflects the slower and smaller transmission of changes in key interest rates into bank deposit rates compared with other forms of financing such as interbank lending and issued debt securities. This channel of monetary policy transmission was significantly impaired during the recent tightening cycle, when the high stock of deposits and the simultaneously high liquidity meant that banks had little need to compete for deposits. Furthermore, the impact was additionally blurred by the long period of negative interest rates, which constitutes a significant proportion of the observed sample, during which banks did not charge negative interest rates on household deposits.

During the last cycle of tightening in 2022 and 2023, monetary policy had a smaller impact on GDP and inflation via the saving and lending channels than in the cycle of 2005 to 2008, where the impact in Slovenia was even weaker owing to the lower level of lending.

Based on the estimated impulse responses, the effectiveness of monetary policy in Slovenia and in the euro area is compared over the last two periods of tightening, namely between 2005 and 2008, and the most recent cycle in 2022 and 2023. For the purposes of this analysis, average values of two structural indicators are calculated, namely the loan flows to NFCs and household deposits as shares of GDP, for both Slovenia and the euro area. These values are used to estimate the impulse responses in order to assess how the transmission of monetary policy is differentiated between the two economies and over time.

An important limitation of the comparison described is that until 2007 Slovenia ran its own monetary policy, for which reason monetary shocks in the euro area were perhaps not reflected in full in the monetary policy stance in Slovenia. The analysis is nevertheless relevant, as even before joining the euro Slovenia was adjusting its monetary policy to that of the euro area, while the focus on financial structure allows for an assessment of how the credit dynamics in loans to NFCs and household deposits affected monetary policy transmission, irrespective of the origin of the shock.

As stated earlier, GDP and inflation respond more strongly to monetary policy shocks when loan flows are higher and household deposits are lower. In the period of 2005 to 2008 loan flows were significantly higher than after 2022: they amounted to 4.5% of GDP in the euro area, and 8.5% of GDP in Slovenia. In the period after 2022 these flows had declined to 1% of GDP in the euro area and almost zero in Slovenia. Consequently the monetary policy tightening had a stronger contraction effect in the period of 2005 to 2008 than in the most recent tightening cycle, with a more pronounced response in GDP and inflation to the monetary policy shock (see Figure 8.2.3), and the response was even more pronounced in Slovenia.[59] Household deposits measured as a share of GDP increased between the two cycles, from 60% to 72% in the euro area and from 47% to 61% in Slovenia, which is indicative of the impaired effectiveness of monetary policy in the most recent cycle via the savings channel too. Due to these changes in financial structure, the transmission of monetary policy effects to economic conditions through the lending and savings channels has weakened in both the euro area and, to an even greater extent, in Slovenia.

9Statistical Appendix

10List of abbreviations

[35] The financial account surplus reflects the developments in the current account and the capital account. The former was in surplus in the amount of EUR 3.0 billion, and the latter was in deficit in the amount of EUR 94 million, while there was a statistical error of EUR 388 million.