Summary

Economic activity in Slovenia continued to strengthen in the third quarter according to the latest data, albeit less than in the previous quarter, with industrial production remaining weak. Inflation slowed slightly at the end of the quarter.

Following weak growth in the second quarter, economic growth in the euro area is expected to continue expanding in the third quarter. This is suggested by the PMI indicator, which rose slightly in September, largely as a result of an improvement in the situation in Germany and Spain, while the contraction in France deepened. Growth in the service sector was stronger than expected, while the manufacturing PMI returned to contraction territory, where it has remained for more than three years except in August. Inflation in the euro area stood at 2.2% in September.

The ECB left its key interest rates unchanged in September for the second consecutive time. By contrast, the Fed lowered its key interest rates by 0.25 percentage points in September, bringing it to a range of 4.00% to 4.25%, in the wake of a significant deterioration in the US labour market. According to current interest rate swap rates, markets expect four or five further cuts of 25 basis points in the Fed’s key interest rate by September 2026, while an additional cut in the ECB’s key interest rates over the same period is not ruled out.

Developments in the international financial markets have been relatively stable since the beginning of September, despite the government shutdown in the US. Yields on US and German government bonds fell, as investors moved into safer asset classes following the recent announcement of additional tariffs on Chinese exports to the US. The major global equity indices rose over the observation period, supported by mostly encouraging economic data and announcements of increased investment in the US technology sector. The price of gold has risen sharply since the beginning of September, reaching new highs.

Sentiment in the domestic economy improved slightly in the third quarter, while the latest data shows economic growth continuing, albeit at a lower rate than in the previous quarter. A slowdown in growth in consumption on the domestic market is indicated, despite persistently high wage growth and low unemployment. Manufacturing output remains weak and continues to face cost pressures and inadequate foreign demand. There has been a sharp reversal in growth in construction, where all segments other than residential construction are showing a year-on-year uptick amid a strong base effect. The nowcast models are forecasting quarterly growth of 0.5% in the third quarter.

International trade slowed over the summer. Merchandise imports and exports in July and August were down in year-on-year terms, by 2.8% and 3.7% respectively, slightly more than in the previous quarter. Services imports were up approximately 2% in year-on-year terms, while exports remained unchanged. The 12-month current account surplus narrowed but remained close to EUR 3 billion. Slovenia’s market share of merchandise exports to the EU declined slightly over the first seven months of the year.

The number of persons in employment is continuing to fall in year-on-year terms, but the labour market remains tight. The registered unemployment rate is low at 4.5%, and there remain major labour shortages. Despite slowing, wage growth remains high, particularly in the public sector. Real wage growth is outpacing growth in labour productivity, which is weakening the cost competitiveness of the economy.

Inflation, as measured by the HICP, decelerated to 2.7% in September. The slowdown was mainly driven by the smaller contribution from the other goods prices and, to a lesser extent, by easing food inflation. The contribution by energy prices meanwhile remained negative. By contrast, services inflation remained robust at 3.8%, supported by relatively strong real wage growth. Services prices therefore continue to drive core inflation, despite its slowdown to 2.4% in September. However, food prices have been the main driver of headline inflation since July and were up 6.4% year on year in September.

The general government deficit will increase to close to 3% of GDP next year according to the government's plans. This is narrowing the space for fiscal policy measures in the event of new macroeconomic shocks. The general government deficit over the 12 months to June of this year widened to 1.7% of GDP. Growth in general government revenues slowed amid weak economic activity, while expenditure is being raised by the wage reform, social security benefits, and investment. Amid the ongoing implementation of the wage agreement and the rise in defence spending, the general government deficit is expected to widen to 2.8% of GDP next year. General government expenditure will also be raised when the adopted pension reform enters into force, while in the long-term sustainability of the pension system will be improved. The public finance developments over the next two years will be profoundly affected by the structural reforms under preparation and their implementation, by investment activity, and by defence spending.

1International Environment

Global economic growth continued in September with moderate outlook despite increased uncertainty in the United States.

September’s PMIs indicate that global economic activity continues to expand (see Figure 1.1). The composite PMI declined slightly to 52.4 points in September, down from 52.9 points in August. Its average of 52.6 points over the third quarter was the highest since the second quarter of 2024, further evidence that the global economy remains in the zone of moderate growth. The gap between manufacturing and services remains, with growth in services slowing slightly. The manufacturing PMI remains at a similar level to the previous month, amid a further increase in output and new orders. Employment remained sluggish, while export demand declined for the sixth consecutive month, which might be partly attributable to the adverse impact of tariff rises.

Among major world economies, India continues to record the highest composite PMI, at 61.0 points. The composite PMI in the US declined slightly to 53.9 points, in reflection of a slight slowdown in growth in services and manufacturing. The average composite PMI in the third quarter nevertheless remains at its highest level of the year. The composite PMI in China rose to 52.5 points, its highest level since June 2024. Meanwhile the composite PMI in Japan declined to 51.3 points, as a result of a sharp decline in industrial production. The figure of 50.1 points for the composite PMI in the UK, its lowest level for five months, is indicative of stagnation, largely on account of a contraction in manufacturing and weak growth in services.

Uncertainty in the US is being additionally heightened by the federal government shutdown, Congress having failed to approve a budget bill by the end of the budget year (30 September). This could have a short-term adverse impact on the economy, but the expectation is that the lost growth will mostly be made up after the end of the shutdown.[1],[2]

The IMF’s October projections are forecasting stable global economic growth of 3.2% this year and 3.1% next year. GDP growth is forecast at 2.0% in the US, 1.3% in the UK, 6.6% in India, 4.8% in China and 0.6% in Russia.

The euro area growth continues according to the PMI indicator, with services remaining its main driver.

GDP in the euro area in the second quarter was up 0.1% compared to the previous quarter. The growth was underpinned mainly by changes in inventories, which accounted for 0.5 percentage points, and by private and government consumption, which each accounted for 0.1 percentage points. Meanwhile there were negative contributions from net exports and gross fixed capital formation, in the amount of 0.2 percentage points and 0.4 percentage points respectively. On the production side, the majority of growth was driven by services, which expanded at a similar rate to the first quarter.

According to the composite PMI, the euro area economy remained in expansion at the end of the third quarter (see Figure 1.2, left). The composite PMI remained at 51.2 points in September, its highest level since May 2024. The expansion was driven by an improvement in the situation in Germany and Spain, while the contraction deepened in France. The services PMI strengthened slightly more notably, rising from 50.5 points in August to 51.3 points, thereby outperforming expectations. Growth in services reached its highest rate since January of this year, as the indicator remained in the zone of expansion for the fourth consecutive month. Conversely, contrary to expectations, the manufacturing PMI fell back into contraction territory at 49.8 index points. With the exception of a temporary improvement in August, this sector has been contracting since June 2022. The continued decline in new orders, particularly due to weaker foreign demand, remains the most concerning factor for the economic outlook.

Similar developments are being reflected by the European Commission’s economic sentiment indicator, which rose to 95.5 points in September, slightly above market expectations (see Figure 1.2, right). The slight improvement was driven by improved expectations in industry and services and among consumers, while retail confidence declined and construction confidence remained unchanged. Further evidence of the moderate optimism regarding economic recovery comes from the slight rise in the ZEW economic sentiment indicator in September, which exceeded expectations. The indicator declined slightly in October, largely on account of the situation in France.

According to the ECB’s September projections, economic growth in the euro area is expected to reach 1.2% this year, which is 0.3 percentage points higher than in the Eurosystem’s June projections, mainly due to more favourable starting conditions and better outcomes in the first half of the year. In 2026, growth is expected to slow slightly to 1.0%, reflecting weaker foreign demand, higher tariffs, and a stronger euro. In 2027, growth is projected to strengthen again, reaching 1.3%. The IMF’s October forecasts project the same growth rate as the ECB for this year, and 0.1 percentage points higher rate in 2026.

Euro area inflation stood at 2.2% in September, remaining close to the monetary policy target rate of 2%.

Year-on-year inflation in the euro area, as measured by the HICP, strengthened slightly to 2.2% in September, after having stabilised at 2.0% over the previous three months (see Figure 1.3, left). The increase was driven in particular by energy prices, which were down just 0.4% year on year, compared with a decline of 2.0% in August. The higher contribution was attributable to a base effect, as the energy prices declined in month-on-month terms. According to the available data, the decline was not driven by fuels but rather by other energy components.

Core inflation, i.e. inflation excluding energy and food prices, stood at 2.3% for the fifth consecutive month. This masks a slight increase in services inflation to 3.2% (up from 3.1% in August), despite slower growth in labour costs and continued weakening in services activity. Meanwhile, ECB indicators regarding future wage developments[3] point to easing wage pressures in the second half of the year, which could help slowing down stubbornly elevated services inflation. Growth in prices of non-energy industrial goods (other goods) remains weak at 0.8%, unchanged from August.

Food inflation slowed to 3.0% (from 3.2% in August), driven entirely by unprocessed food prices. Their developments reflect a negative base effect and a monthly price growth that was nevertheless smaller than typically observed in September.[4] However, food inflation in Slovenia was more than double the rate of the euro area overall (see Figure 1.3, right). A breakdown by subcomponents suggests the difference stems from a faster domestic growth in prices of meat, oil and fats, and non-alcoholic beverages.[5]

In September, inflation in 15 euro area countries outpaced the euro area average. The lowest rate was seen in Cyprus (0.0%), while the highest rate was recorded by Estonia (5.2%).

2Monetary Policy and Financial Markets

The Eurosystem left the interest rate on the deposit facility unchanged at 2.00% in September, while the Fed lowered its key interest rate to a target range of 4.00% and 4.25%.

In light of stable inflation and the inflation outlook, the Eurosystem left all three key interest rates unchanged for the second consecutive meeting in September. The interest rates on the deposit facility, main refinancing operations and the marginal lending facility remain at 2.00%, 2.15% and 2.40%, respectively.

The Fed lowered its key interest rate by 0.25 percentage points at its September meeting, to the corridor between 4.00% and 4.25%, largely due to a significant deterioration in the US labour market. This was the first cut in the Fed’s key interest rate since December 2024.[6] Key interest rates were also cut by the central banks of Canada (to 2.50%) and Norway (to 4.00%), while rates remained unchanged in Japan (at 0.50%), the UK (at 4.00%) and Australia (at 3.60%).

There has been no significant change since the beginning of September in the expectations regarding developments in the key interest rates at the ECB, but markets are anticipating slightly faster cuts in the Fed's key interest rate over the medium term. This is primarily attributable to the worsening trade relations between the US and China, and a deterioration in the US labour market, all in the context of inflation figures that remain above the Fed’s target rate, albeit mostly in line with market expectations. According to current overnight index swap rates (OIS), the markets are not ruling out the possibility of an additional rate cut by the ECB before September 2026. Four or five further rate cuts of 25 basis points are expected at the Fed by September 2026, which would bring the rate to the corridor between 2.75% and 3.00% or between 3.00% and 3.50% (see Figure 2.1, left).

The leading global equity indices rose further in the wake of mostly encouraging economic data, and announcements of significant investment by technology firms. Gold also reached record highs.

Driven by strengthening market expectations of larger rate cuts by the Fed over the next year, yields on US short-term and long-term Treasuries have fallen by 0.12 percentage points and 0.21 percentage points, respectively, since the beginning of September (see Figure 2.1, right). The decline in yields was attributable to the release of figures showing a moderate increase in personal consumption expenditures in August (as measured by the PCE index), which eased the market concerns about rising inflation, as well as the announcement of additional tariffs on imports of all goods from China. The impact in the US was also transmitted to bond markets in the euro area. As investors moved into safer asset classes, yields on German government bonds also declined slightly, by 0.03 percentage points on short-term bonds and 0.15 percentage points on long-term bonds. The spreads between yields on euro area government bonds with higher credit risk and the German benchmarks remained low over the observed period.

The major global equity indices have mostly risen since the beginning of September. The rise was driven by encouraging economic data and growing investor optimism about the strength of the global technology sector following announcements of significant investment by US technology firms. However, the upward trend in equity indices ended as investors shifted towards safer asset classes amid deteriorating trade relations between the US and China. The main European index (STOXX Europe 600) has gained 3.4% over this period but remains below its record high from early October. Similar increases were seen in the leading US index (S&P 500) and the Magnificent Seven index of leading technology firms, which are up 3.3% and 7.6%, respectively, since the beginning of September (see Figure 2.2, left). Hong Kong’s tech-focused Hang Seng Index fell sharply after the announcement of new US tariffs, but is nevertheless up 3.2% since the beginning of September.

The US dollar has appreciated slightly since the beginning of September, driven mainly by encouraging economic data and, in early October, by investors’ retreat to safe-haven currencies. It gained 0.2% against the euro, and 0.8% against a basket of major global currencies (see Figure 2.2, right). The price of gold has increased by 22.7% since the beginning of September, driven by the heightened political uncertainty in the US, with the government shutdown coming into effect at the end of September, and by the escalating global trade war. The rise in gold prices was further fuelled by market expectations of faster rate cuts by the Fed. Gold is currently at a record high (USD 4,200 per ounce). The price of Brent crude oil has fallen by 8.6% since the beginning of September, reflecting investor concerns about the trade war’s adverse impact on global economic growth, and expectations that OPEC+ will again increase oil production.

3Domestic Economic Activity

The economic sentiment indicators for the third quarter show a rise in confidence at construction firms, and a rise in output expectations in manufacturing.

The economic sentiment remained solid in the third quarter, given the situation in the international environment (see Figure 3.1, left). The indicator rose to -1.6 percentage points in September, comparable to its average between 2010 and 2024. The most pronounced improvement in confidence compared with previous months came in construction, where firms reported an increase in the amount of construction put in place over the last three months and a rise in total order books. They were also expecting a significant rise in employment over the next three months.

Confidence in the retail sector rose to a higher level than in previous months. The rise was driven by a run-down in inventories, expectations of further rises in selling prices, and a much smaller decline in sales according to the survey data compared with previous months. Confidence remained relatively high in the service sector, although in September it was down slightly on the previous months. The assessments of demand and employment expectations remained favourable, while service firms were expecting slightly slower growth in prices than in the first half of the year.

Manufacturing confidence remained below its long-term average, but nevertheless reached its highest level since February 2023. The minor improvement in sentiment was primarily attributable to improved expectations regarding output. Firms also gave more favourable assessments of their current output in September than in August. This component of the indicator reached its highest level since November 2022. Conversely the issues with weak demand are set to continue, as assessments of export orders and total orders remained low.

Consumer confidence improved slightly in September, approaching its average for the period 2010–2024. They nevertheless expressed concerns surrounding the economic situation and inflation over the next 12 months, but also assessed the past rise in prices as high (see Figure 3.1, right). They gave above-average assessments of their current financial situation, convenience for major purchases over the next 12 months, and the financial situation over the last 12 months.

Manufacturing output remained relatively weak in the third quarter, while consumption on the domestic market slowed. Activity in the construction sector picked up.

Total manufacturing activity continues to reflect the deterioration in exporters’ cost competitiveness and the issues with foreign demand (for more about developments in the competitiveness of the Slovenian economy, see Box 5.1). This year, monthly developments are weak, and output was down 1.6% in year-on-year terms in August.[7] A fall in output was faced in August by 14 of the 21 sectors for which data is available, and the gap between the sectors with the largest fall and the largest increase was 78.4 percentage points. Manufacturing output over the first eight months of this year was down 1.2% in year-on-year terms, again with major differences between sectors. In terms of technological complexity, it was only high-tech sectors that succeeded in increasing output, which is indicative of the increasing role played by the pharmaceutical sector in driving economic growth. The situation in industry overall was even less favourable: output in the energy sector has been declining sharply since 2020, at least according to the monthly data (see Figure 3.2, left).

Activity in construction rose sharply over the summer in all segments other than residential construction. The year-on-year reversal in growth began in May amid strong monthly dynamics, and activity in August was already up 25.2% on a year earlier. This is indicative of the high volatility in the sector, partly on account of a strong base effect, which was most pronounced in August. The sharpest reversal was seen in civil engineering work, and was indicative of the increase in infrastructure projects (road construction), where the government and government-affiliated firms usually play a central role (see Figure 3.2, left).

Activity in residential construction remains down in year-on-year terms, despite a low base. It was down 9.3% in August (see Figure 3.2, left). The situation is increasingly unfavourable from the perspective of consumer purchasing power: residential real estate prices rose by 112.1% between the final quarter of 2015 and the second quarter of this year according to the SORS data, while compensation per employee rose by just 66.8% over the same period according to the national accounts. There is no expectation of a sharper increase in the supply of residential real estate over the next few years, as the number of new building permits remains relatively low despite rising this year, and the corresponding floorspace is even lower than last year.

The first data available for the complete third quarter shows a slowdown in consumption in the domestic market. The year-on-year increases in card payments and ATM withdrawals and in invoices registered with tax authorities were weaker than in the second quarter, despite rising to 4.9% and 3.5% respectively in September (see Figure 3.2, right). July was an unfavourable month according to turnover (real income) in retail and other private-sector services: total sales were down 0.7% on the previous month, and down 0.2% in year-on-year terms (see Figure 3.2, left). These developments were somewhat surprising, as the situation on the labour market remains favourable from the perspective of private consumption, and July recorded the highest number of tourist arrivals for that month to date. Despite this, the year-on-year increase in retail turnover was weak in July at just 0.6%, and turnover was unchanged in accommodation and food service activities. Turnover in real estate activities continued to decline in year-on-year terms amid very high prices, but consumers continued to increase their spending on car purchases.

4Labour Market

The number of employees is decreasing, but the labour market remains tight.

The number of persons in employment decreased year-on-year by 0.4% in August, to 938,175 (Figure 4.1, left). The decline was most pronounced in the private sector, particularly in manufacturing, where employment fell by 1.8%. The reduction in employment is mainly influenced by the cooling of economic activity and retirements. Companies continue to address the shortage of domestic labour by hiring foreign workers, whose number among the employed population continues to increase; their share reached 15.8% in July. Despite the slowdown in employment, survey indicators continue to show a relatively favorable picture, as companies’ expectations regarding future employment remained positive across all activities in September (Figure 4.1, right).

The labour market remains tight. The number of registered unemployed in September was 43,944, which is 0.2% higher than in the same period last year. The registered unemployment rate did not change year-on-year in July and remains low at 4.5%. After several years of decline, the number of unemployed has clearly stabilized at just over 40,000 people. The tightness of the labour market is also confirmed by survey indicators on labour shortages, which remain at high levels across all sectors and have not changed significantly year-on-year.

Wage growth remains robust, mainly due to developments in the public sector.

The average gross wage in July was 5.8% higher year-on-year, which represents the lowest growth rate this year. The public sector has had a significant impact on maintaining relatively high wage growth.[9] In the private sector, wage growth has hovered around 5% for several months, reaching 5.2% in July, while in the public sector it has remained considerably higher. After strong growth in the first half of the year, averaging nearly 12%, it slowed to 6.9% in July (Figure 4.2, left), which is mostly attributed to the expiration of the wage adjustment to inflation that took place in June 2024.[10]

Alongside high nominal growth, real wage growth has also continued, reaching 2.9% in July. The strong real wage growth, present since 2023, exceeds the real growth of labour productivity, which worsens companies’ cost competitiveness (for more on the competitiveness of the Slovenian economy, see Box 5.1). In the private sector, the average wage was about 13% higher in real terms compared to 2019, while labour productivity in the same period increased by about 7% (Figure 4.2, right).

5Current Account

The nominal decline in merchandise trade seen in the second quarter continued over the summer, while year-on-year growth in services trade also slowed.

Nominal merchandise exports in July and August were down 3.7% overall in year-on-year terms according to balance of payments figures. This was slightly larger than the decline in the previous quarter, when exports remained at a similar level to the previous year (down 0.5%). The decline was mainly attributable to lower sales on euro area markets, most notably Croatia and Germany, and in certain countries outside the EU (most notably Switzerland and the US).[11] The breakdown by products (according to SORS data) shows a particular decline in exports of iron and steel. Re-exports, i.e. exports of previously imported refined petroleum products and electricity, were weaker. The decline in total merchandise exports was slightly mitigated by stronger exports of road vehicles, transport equipment and food products.

The nominal decline in merchandise imports stood at 2.8% according to balance of payments figures. This was slightly more than in the second quarter (–1.8%), largely as a result of a decline in imports of chemical products and transport equipment. The larger decline in imports was mitigated by imports of non-monetary gold and metal products. In terms of broad economic category, the main decline was in imports of capital goods (down 7.2%), which coincided with weaker investment activity in the corporate sector. In the geographical breakdown, the main decline was in imports from euro area countries (–4.1%), most notably Italy and Germany.

Year-on-year nominal growth in services trade also slowed sharply. Services exports in July and August were virtually unchanged in year-on-year terms (down 0.1%), significantly worse than the growth of 6% recorded in the previous quarter. This was primarily attributable to declines in exports of transport services and other business services (of 7.4% and 7.9% respectively), and the contraction in exports of construction services (of 9.1%), which have been in decline since March of last year. A larger deterioration was prevented by exports of insurance and pension services, which more than doubled, most notably those to Italy.

Services imports by contrast were up 2.0% in year-on-year terms, only slightly less than in the second quarter (2.8%). The rise was driven by relatively strong imports in the majority of categories other than transport services and construction services, which were down 14.4% and 10.5% respectively. There were notable increases in imports of health services, and government goods and services,[12] which more than tripled in year-on-year terms.

The 12-month current account surplus narrowed slightly but remained close to EUR 3 billion in August.

The current account surplus over the 12 months to August amounted to almost EUR 3 billion, or just EUR 110 million less than a year earlier (see Figure 5.1, left). The largest factor in the surplus was services trade, where the surplus reached EUR 3.7 billion. The merchandise trade balance was EUR 350 million in surplus, down just over EUR 90 million in year-on-year terms but has remained consistently in surplus since August 2023. Its largest components were the merchandise trade surpluses with Russia and Croatia, while merchandise trade deficits with Italy and Austria widened (see Figure 5.1, right).

The current account surplus continues to be narrowed by the income balance, which recorded a deficit of EUR 1.1 billion over the 12 months to August, up 9.4% on a year earlier. The deficit in primary income narrowed by approximately a third, largely mainly due to higher net income from capital (most notably equity and reinvested earnings). Conversely the deficit in secondary income almost tripled, driven above all by smaller inflows from current international cooperation with EU institutions (excluding the ECB), and other current transfers (most notably non-life insurance claims).

6Inflation

The price of the representative basket of goods and services is rising mainly due to food prices. Services inflation remains elevated.

Year-on-year inflation, as measured by the HICP, decelerated to 2.7% in September, down from 3.0% in August (see Figure 6.1, left). The slowdown was driven primarily by a smaller contribution from other goods prices, and to a lesser extent by food inflation, which eased to 6.4% in September, down from 6.8% in August. Food inflation declined roughly equally because of smaller contributions of unprocessed food and processed food prices, reflecting base effects in the former and month-on-month decreases in prices of sugar, other food products and non-alcoholic beverages in the latter.

Food prices nevertheless remain the main driver of the overall inflation and have also recorded the strongest increase since the pre-pandemic period among the main inflation components. Meanwhile, pipeline pressures remain elevated, at least in the short term, reflecting recent developments along the food supply chains. The growth of producer prices of agricultural products has strengthened, particularly for beef prices, while import and producer prices have continued to rise at an increasingly faster pace. In August, their annual growth rates accelerated to 5.2% and 4.9%, respectively, suggesting broader food supply pressures (see Figure 6.1, right).

By contrast, energy price pressures remain subdued as global oil and gas prices have continued to decline, supported by the euro’s year-on-year appreciation against the US dollar. This has been reflected in consumer energy prices, which were again slightly lower vis-à-vis the preceding month. However, the year-on-year rate of energy prices increased to –2.4%, from –3.9% in August, owing to base effects related to price developments in September of last year.

Core inflation, i.e. inflation excluding energy and food prices, slowed to 2.4% in September, down from 2.9% in August. The slowdown was expected and was driven en-tirely by other goods prices, as August’s one-off base effect dropped out of the calculation[16].Year-on-year inflation in other goods prices therefore stood at 0.7% in September, down from 1.8% in August. Indeed, the monthly increase in clothing and footwear prices, typically observed in September during the seasonal changeover to autumn and winter collections, was less pronounced than in the previous year. By contrast, services prices declined in month-on-month terms, largely reflecting lower prices in the tourism sector. Nevertheless, its year-on-year rate remained robust at 3.8% (up from 3.7% in August) and broad-based: the 0.1 percentage point increase in September was observed across health, cultural and other services prices. Looking forward, services inflation continues to be supported by relatively high real wage growth that is sustaining private consumption,[17] whereas firms' expectations also point to stable growth in services prices in the near term.

 

7Fiscal Position

The general government deficit widened in the first half of the year. The largest factor in the rise in expenditure was the implementation of a new wage reform. Growth in general government revenues slowed as the economy cooled.

The general government deficit over the first half of the year amounted to EUR 1,060 million or 3.1% of GDP, EUR 561 million or 1.6 GDP percentage points wider than the same period last year.[18] From 0.9% of GDP at the end of 2024 also after revision, the 12-month deficit had widened to 1.7% of GDP by the end of June 2025. The small primary surplus swung into a deficit.

General government revenues in the first half of the year were up EUR 703 million or 4.8% in year-on-year terms (see Figure 7.1, left). The slowdown in growth compared with the previous year was largely attributable to the temporary effect of the transformation of supplementary health insurance into a compulsory health contribution (which accounted for 2.3 percentage points of last year’s revenue growth), while economic growth has also slowed. The main driver of a rise in general government revenues remains social security contributions, with the labour market situation remaining relatively favourable for the public finances. Growth in personal income tax revenues slowed to 4.2%, as a result of adjustments in tax brackets and allowances. According to SORS estimates, corporate income tax revenues over the first six months of the year also recorded slower growth (5.0%). Growth in revenues from taxes on production and imports was similar to growth in household consumption. Revenues from property income, which include interest and dividends, were down.

General government expenditure in the first half of the year was up 8.3% or EUR 1,264 million in year-on-year terms (see Figure 7.1, right). The largest factor in the increase was compensation of employees, whose growth of 12.8% was the result of the implementation of the new wage reform, and also reflects last year’s wage increase in June, promotions at the end of the year, and a rise in employment. Social security benefits were up 7.1%, while pensions grew slightly faster in the first half of the year according to the ZPIZ data, on account of regular increase and a rise in the number of pensioners. Expenditure on investment and subsidies also strengthened, while interest payments were down slightly in year-on-year terms.

The available data for the third quarter suggests that the fiscal position has most likely not changed significantly in the year-on-year comparison.

The consolidated general government deficit over the first half of the year was almost EUR 600 million wider in year-on-year terms, while the available data for the third quarter shows no significant change.[19] The consolidated general government deficit in July and August however amounted to EUR 200 million, EUR 94 million more than in the same period last year.[20] The state budget deficit over these two months widened by EUR 159 million, but the preliminary data for September suggests that the overall position in the third quarter was similar to the same period last year. The developments in the area of taxes seen in the first half of the year largely continued, but the initial payments of the long-term care contribution increased growth in social security contributions. On the expenditure side wage payments and social transfers to individuals and households continued to increase.

The general government debt temporarily increased in the middle of the year, but is expected to have declined again by the end of the year.

The general government debt amounted to EUR 47.5 billion or 69.4% of GDP at the midpoint of this year, up EUR 2.6 billion on the end of last year. The nominal increase is being driven by an increase in long-term and short-term borrowing alike. The largest part of debt maturing this year came in July (RS75 bonds in the amount of EUR 1.9 billion with a coupon rate of 2.125%), when a new bond with a slightly smaller principal was issued (RS97 bonds in the amount of EUR 1.0 billion with a coupon rate of 3.125%). The debt will consequently decline in the second half of the year, although the implicit interest rate will rise. This stood at 1.9% at the midpoint of this year, unchanged from the end of last year, but up from the lows of 1.6% seen in 2021 and 2022.

The fiscal space for mitigating any future shocks is being reduced by the planned increase in the deficit.

According to the government’s latest estimates from the Draft budgetary plan, the general government deficit is also expected to increase next year, from 2.4% of GDP this year to 2.8% of GDP. The main driver according to the government estimates is defence spending, which is forecast to increase by 0.4 GDP percentage points according to the COFOG (from 1.41% of GDP this year to 1.78% of GDP next year). The general government debt is forecast to stand at 66.0% of GDP at the end of this year, before declining further to 64.7% of GDP next year, largely as a result of growth in GDP and the utilisation of the government’s extensive cash reserves.

Given the planned state budget deficits of slightly under 3% of GDP over the next two years (2.9% of GDP in 2026 and 2.8% of GDP in 2027), the fiscal space for mitigating any future shocks is diminishing. The deficit already takes account of the implementation of certain major structural reforms, such as the wage reform in the public sector, the pension reform, the introduction of long-term care, gradual changes in healthcare, increased defence spending and the continuation of the post-flood reconstruction. Alongside the implementation of the aforementioned reforms and the post-flood reconstruction, a further risk to the public finances is posed by the implementation of other planned investments, the uncertain geopolitical situation, which might affect economic growth, and the introduction of a tax-free winter bonus (Christmas bonus).

8Statistical Appendix

9List of Abbreviations