Summary

Following subdued GDP growth in 2025, a faster economic recovery this year is being held back by heightened geopolitical uncertainty and increased inflationary pressures. According to the projections, GDP growth will reach 1.9% in 2026, before rising to 2.2% in both 2027 and 2028. The uncertain outlook this year will be accompanied by elevated inflation of 3.6%, which is expected to gradually decline towards 2.3% and 2.0% in 2027 and 2028 respectively, in line with the anticipated easing of energy prices and domestic cost pressures.

GDP growth was encouraging at the start of the year, however, uncertainty related to the situation in the Middle East is worsening the short-term outlook. In the first quarter, economic activity increased by 0.7% quarter-on-quarter and by 3.0% year-on-year, meaning that growth in Slovenia significantly outpaced the euro area average. Particularly encouraging was the broad-based growth in value added, which, in addition to activities linked to domestic consumption, also reflected a strengthening of manufacturing and goods exports. The positive developments at the beginning of the year have, since April, been exposed to a marked increase in uncertainty, rising energy prices, and weaker economic prospects in our main EU trading partners. In addition to the expected impact on investment and export activity, the first indicators for the second quarter also point to a moderation in private consumption amid lower consumer confidence. This will contribute to a temporary slowdown in economic growth in the coming quarters.

This year, economic growth will be driven mainly by domestic demand. As international environment stabilise, growth will gradually strengthen and become more balanced in the coming years. Despite renewed inflationary pressures, household purchasing power will remain supported by strong wage growth, linked to the adjustment of the minimum wage, public sector wage reform, and a still-tight labour market. Private consumption growth will therefore remain robust but will initially lag behind the growth of real disposable income due to increased precautionary saving amid weaker consumer confidence. Government consumption will also make a significant contribution to growth this year, particularly as a result of the implementation of the Long-Term Care Act and rising public sector employment. In contrast, gross fixed capital formation will decline in the first two years. This year, investment by enterprises will fall due to high uncertainty, increased cost pressures, and low capacity utilisation, while next year, investment in the government sector will decrease as the EU Recovery and Resilience Facility programme draws to a close. As the external environment improves, exports and investment will gradually strengthen, however, an even faster recovery will continue to be constrained by unfavourable terms of trade and rising labour costs. Against this backdrop, GDP growth is projected at 1.9% this year and 2.2% in both 2027 and 2028.

Employment growth was still relatively favourable at the start of the year, but uncertainty about the economic outlook and labour market tightness are weighing on the medium-term outlook. In the first quarter, employment increased again, but mainly as a result of further growth in government sector, which will remain an important driver of growth over the projection horizon, while employment growth in the private sector is expected to be considerably more modest. Total employment is projected to increase by 0.4% this year and by 0.2% in both 2027 and 2028. The unemployment rate will remain low in the coming years, averaging 3.9%, which will maintain a significant labour shortage. This is confirmed by both survey indicators and the high number of job vacancies. Tight labour market conditions will continue to support relatively strong wage growth. Wages are projected to increase by 7.2% this year, mainly due to the increase in the minimum wage, and will outpace labour productivity growth, further adding to cost pressures. In the following two years, wage growth will gradually moderate to 4.8% and 4.4% respectively.

Inflation will accelerate again this year, driven by both external factors and persistent domestic cost pressures. The situation in the Middle East has already been reflected in price developments in Slovenia in April and May, when inflation increased by more than one percentage point compared with the beginning of the year. Higher prices of energy and intermediate goods in international supply chains will keep inflation elevated for the remainder of the year. Domestic factors will also contribute, including strong growth in labour costs, construction activity stimulated by public investment, and still robust private consumption. Accordingly, inflation in Slovenia is expected to stand at 3.6% this year. In 2027 and 2028, it will gradually approach the 2% price stability target as it reaches 2.3% and 2.0% respectively, although developments across price groups will remain quite diverse. While energy prices are expected to decline, reflecting futures prices for oil and strong base effects, the growth of services prices will remain above three percent. This will be due to the lagged adjustment to past cost pressures and further strengthening of domestic demand, which will allow for the upward adjustment of final prices.

Both the domestic and external macroeconomic environment are subject to heightened risks, which could result in lower economic growth and higher inflation than projected. The baseline scenario in next quarters assumes a calming of military tensions in the Middle East. In contrast, a prolonged period of tensions would, through higher energy and commodity prices, supply chain disruptions, weaker global demand, increased uncertainty, and financial stress, translate into lower investment and a further deterioration in the export sector. At the same time, supply shocks could trigger broader and non-linear inflationary pressures, which would be further amplified domestically by wage growth outpacing productivity. Fiscal risks are also becoming increasingly important. With strong expenditure growth last year and this year, the government deficit is projected to approach the reference value of 3% in 2026 and to exceed it in coming years. This will interrupt the decline in the debt-to-GDP ratio and further reduce the fiscal space to respond to potential shocks in an environment of heightened geopolitical risks. Additional measures without appropriate funding could further worsen the fiscal position, tighten financing conditions, increase the need for consolidation, and limit the countercyclical role of fiscal policy.

The main messages contained in this publication are supported by topical analytical boxes, while the risk of a prolonged conflict in the Middle East is addressed in an alternative scenario. At present, the war is primarily reflected in higher energy prices, with the projections also taking into account, based on our empirical estimates, the gradual pass-through of these prices to other price categories. The impact on the real economy has so far been mainly limited to increased uncertainty, which is holding back corporate investment. The analytical box in this publication also confirms its negative effect on private consumption, particularly of durable goods. This year, inflationary pressures on purchasing power will be mitigated by strong wage growth, supported by an above-average adjustment of the minimum wage, which, together with spillover effects into higher wage brackets, is estimated to contribute to an approximately two percentage point higher growth in the average wage. As wage growth outpaces productivity growth, pressures on competitiveness will increase, which, according to model estimates incorporated in the projection, will slow the recovery of export growth by around 0.8 percentage points per year. The baseline scenario assumes a gradual easing of the conflict in the Middle East, however, should it persist for longer, the alternative scenario projects that average GDP growth in the period 2026–2028 would be 0.6 percentage points lower than in the baseline, while inflation would be approximately one percentage point higher. The mitigation of these effects would be hampered by limited fiscal space, as the box on public finance developments shows that the deficit will already exceed 3% of GDP in the baseline scenario.

Table 1: Macroeconomic projections for Slovenia, 2026 to 2028

Sources: SURS, Eurostat, Banka Slovenije projections.

Note: * Based on national accounts deflators. ∆: difference between current projections and projections given in the December 2025 issue of the Review of Macroeconomic Developments and Projections.

1Current Economic Developments and Assumptions

In the first quarter, domestic economic growth was encouraging. The domestic environment continued to underpin the expansion of final consumption and investment. At the same time, goods exports rebounded in line with increased manufacturing output. In view of the considerable uncertainty surrounding estimates and the volatility of short-term indicators, we anticipate that economic growth will temporarily ease in the second quarter, reflecting heightened geopolitical tensions, cost pressures and a weaker international environment.

1.1International situation and external assumptions

While the effects of the war in the Middle East are already reflected in certain economic indicators and represent a risk to global economic activity, economic activity strengthened in the first quarter.

Economic activity in major economies increased in the first quarter, primarily due to favourable developments in the first two months of the year, while the effects of the war in the Middle East were only partially captured in the March data. In the United States, current economic growth rose to 0.4% following a weaker previous quarter, with the main contributions coming from investments related to artificial intelligence and private consumption. However, private consumption is already moderating somewhat amid heightened uncertainty and renewed inflationary pressures. Following the reopening of the federal government, public consumption also contributed to growth, whereas net trade acted as a drag, mainly due to faster growth in imports. In Japan, the economy expanded by 0.5%, with growth being broad-based and exceeding market expectations. In the United Kingdom, current growth stood at 0.6%, supported primarily by investments as well as household and government consumption. The Chinese economy strengthened by 1.3%, despite persistently weak domestic consumption, mainly associated with the crisis in the real estate sector.

The war in the Middle East, together with higher energy costs and increased uncertainty, is dampening global economic activity in the second quarter. After a marked decline in March, the composite PMI indicator rose slightly in April and remained at 51.8 index points in May, but continues to stay below last year’s average. Activity in the services sector strengthened somewhat following the deterioration in March, mainly due to favourable developments in business and financial services. Conversely, activity in consumer-oriented services declined again, which is linked to elevated uncertainty and higher energy prices. Activity in manufacturing continues to increase, while the gap persists between relatively favourable current production indicators and weaker business expectations. The resilience of production may partly reflect early ordering in anticipation of longer delivery times and higher prices, whereas weaker expectations indicate deteriorating prospects due to geopolitical uncertainty. The index of pressures in global supply chains (GSCPI) also points to increased risks in production chains, having risen in April to its highest level since July 2022.

According to the ECB’s June projections, global economic growth excluding the euro area is expected to slow somewhat this year as a result of the war in the Middle East. Compared with the March projections, it has been revised to 3.0% (Figure 1.1.1, left). In the coming years, it is projected to gradually strengthen again, reaching 3.2% in 2027 and 3.3% in 2028.

For the euro area, survey indicators suggest a continued contraction of economic activity in the second quarter.

Economic activity in the euro area declined by 0.2% quarter-on-quarter in the first quarter, however, this contraction largely reflects a sharp downturn in the Irish economy, which, according to revised data, contracted by 12.1%[1] (Figure 1.1.1, right). Excluding Ireland, euro area economic growth stood at 0.2%. Growth was supported by net trade (0.3 percentage points) and both government and private consumption (each contributing 0.1 percentage points), while gross fixed capital formation acted as a drag (–0.1 percentage points). By sector, most of the growth originated from services and industry. Among the larger euro area economies, Spain again recorded the highest growth (0.6%), mainly supported by domestic demand. Growth in Germany and Italy was more moderate, at 0.3%, while the French economy contracted (–0.1%) due to a decline in private consumption and investment.

Current survey indicators show that the effects of the war in the Middle East and the associated high energy prices are already being reflected in economic activity. The composite PMI indicator fell further into contraction territory in May, reaching 48.5 index points. This primarily reflects a contraction in services, which is the result of higher household costs due to more expensive energy and a decline in confidence. In manufacturing, activity continued to increase, albeit to a lesser extent than in April. The moderation in growth is mainly related to weaker demand and a reduction in new orders, indicating a gradual fading of the effects of early ordering prompted by expectations of higher prices and supply disruptions. Risks in manufacturing therefore remain linked to cost pressures, extended delivery times for input materials, and disruptions in global logistics flows.

This is similarly indicated by the ZEW and European Commission economic sentiment indicators. Both deteriorated sharply in April and improved slightly in May but remained well below the levels recorded prior to the onset of the current war. Compared with the period following the outbreak of the war in Ukraine in 2022, the current deterioration in overall sentiment is less pronounced. Nevertheless, the sharp decline in consumer confidence and the somewhat less pronounced deterioration in confidence in the services sector – from already lower initial levels – point to weaker consumer demand. This could, compared with the previous energy crisis, limit the pass-through of the current shock to inflation.

Headline inflation in the euro area has increased for the third consecutive month since the onset of the conflict in the Middle East, reaching 3.2% in May. While food inflation moderated to 2.0%, the year-on-year growth in energy prices has remained above 10% for the second month in a row and rose to 10.9% in May, reflecting a positive base effect amid ongoing price declines. The increase in headline inflation was primarily attributable to higher services inflation (3.5%), which stemmed from both ongoing price increases and a positive base effect.[2] The acceleration of core inflation to 2.5% was further supported by higher year-on-year growth in non-energy industrial goods (hereinafter: other goods) prices, which stood at 0.9%.

Core inflation momentum[3] continued to strengthen in May, with elevated cost-push inflationary pressures also reflected in higher expected input and output prices, short-term inflation expectations, and developments in import prices.[4] Nevertheless, a broader set of indicators – including measures of core inflation, inflation of energy-sensitive products, inflation shock momentum, and inflation of products sensitive to monetary policy – up to and including April, do not yet point to medium-term inflationary pressures comparable to those observed at the onset of the war in Ukraine.[5] Several factors suggest potentially slower transmission of the energy price shock than after the start of the war in Ukraine, such as a weaker initial level of inflationary pressures at the outbreak of the shock, a less accommodative stance of economic policies, and relatively smaller supply chain disruptions.[6]

According to the ECB experts’ June projections, economic growth in the euro area is expected to slow to 0.8% this year as a result of the consequences of the war in the Middle East. This will be mainly driven by lower household purchasing power due to higher energy prices, as well as slower growth in investment and international trade amid increased uncertainty. Growth is then projected to gradually strengthen to 1.2% in 2027 and 1.5% in 2028. Compared with the December projections, which did not yet take into account the effects of the war, this represents a downward revision of 0.4 and 0.2 percentage points for 2026 and 2027, respectively, while the projection for 2028 has been revised upwards by 0.1 percentage points. Headline inflation is expected to rise to 3.0% this year, mainly due to higher energy prices. As the energy shock is expected to subside, inflation is projected to gradually moderate to 2.3% in 2027 and 2.0% in 2028. Relative to the December projections, inflation for 2026 and 2027 has been revised upwards by 1.1 and 0.5 percentage points, respectively, while the projection for 2028 remains unchanged.

The June assumptions for the international environment foresee higher prices of energy and primary commodities, weaker global economic growth, lower growth in foreign demand for Slovenia, and tighter financing conditions.

In the main assumptions for the external environment,[7] the war in the Middle East is reflected primarily through higher prices of energy and commodities. The average oil price is expected to reach EUR 82.5 per barrel this year, which is one third higher than last year, and is projected to gradually decline in the coming years. The increase in energy prices, together with heightened pressures in supply chains, is also resulting in higher prices of primary commodities. Amid increased uncertainty and a slowdown in global economic activity, the growth of foreign demand for Slovenia is expected to moderate somewhat this year, before recovering in the following years, although remaining below the long-term average.[8] Compared with the December assumptions, tighter financing conditions are also foreseen, along with a slight appreciation of the euro against the US dollar (Table 1.1.1).

Table 1.1.1 : Assumptions for the international environment

Sources: ECB, Banka Slovenije calculations.

1.2Domestic economic environment

Domestic economic growth strengthened year-on-year in the first quarter, further supported by investment and final consumption in the domestic market, while the negative contribution of external trade diminished as exports increased.

In the first quarter, economic activity continued to increase, rising by 0.7% compared with the previous quarter, while year-on-year growth accelerated to 3.0%, thus significantly exceeding the euro area average. Against the backdrop of last year’s low base, this was largely attributable to a less negative contribution from net trade with foreign countries, which amounted to –0.5 percentage points (Figure 1.2.1, left). Notably, goods exports strengthened despite further deterioration in the international environment in March, which may also reflect advance orders in the face of uncertainty regarding supply chains in the coming months.

Private consumption remained a stable driver of growth, supported by the increase in the minimum wage and the introduction of the mandatory winter allowance. It was broad-based and strengthened both on a current and annual basis, contributing 1.4 percentage points to year-on-year GDP growth. With rising employment in the general government sector and higher expenditure on healthcare and long-term care, government consumption also increased, contributing an additional 0.9 percentage points to economic growth.

Year-on-year growth in gross fixed capital formation accelerated further, reaching 12.6% and contributing 2.6 percentage points to GDP growth. Growth was driven primarily by continued strengthening of investment in equipment and machinery, as well as government investment projects supported by EU funds. Due to the negative contribution of changes in inventories, the total contribution of gross investment to GDP growth was lower, at 1.2 percentage points.

Value added growth was driven mainly by private services and construction, with some signs of recovery in manufacturing.

Total value added was 2.6% higher year-on-year in the first quarter. Private services contributed the most to growth, at 1.1 percentage points (Figure 1.2.1, right), with the largest contributions coming from services with higher value-added per employee, such as information, financial, and professional and technical services. Monthly indicators also point to strong growth in accommodation and food service activities. Conditions in trade and transport were less favourable, as monthly data indicate year-on-year stagnation in retail trade turnover despite a March spike in fuel sales, and a decline in activity in transport and storage. This was partly related to increased fuel purchases at petrol stations ahead of the announced rise in liquid fuel prices, which was already reflected in a monthly decline in revenues in this segment in April. Value added in public services increased by 2.5% year-on-year amid higher government consumption, contributing 0.5 percentage points to GDP growth.

Among individual activities, construction contributed the most to GDP growth (0.8 percentage points), with value added increasing by 15.0% year-on-year from a low base, mainly due to an increase in the value of specialised construction put in place. On a quarterly basis, value added declined, indicating a moderation of activity following strong growth at the end of last year.

With the strengthening of goods exports, conditions also improved at the beginning of the year in manufacturing, where value added increased by 1.4% after last year’s decline. Monthly data on industrial production indicate that growth was concentrated in sectors with lower technological intensity, while production in more technologically advanced sectors declined (Figure 1.2.2, left). In other industrial activities, particularly energy, activity contracted sharply, so that the overall contribution of industry to GDP growth was slightly negative (–0.1 percentage points).

Further deterioration in the international environment in the second quarter is reflected mainly as a price shock, while its impact on economic activity remains limited, despite increased monthly volatility in survey indicators.

Economic sentiment, after worsening in April, returned in May to its long-term average (Figure 1.2.2, right). Consumer confidence improved slightly, though it remained below the level of the first quarter and last year’s average. The confidence indicator also increased across all activities, in trade and other services even above the level of the first quarter. In manufacturing, sentiment improved, although capacity utilisation remained persistently lower than in the five-year period before the pandemic, and the volume of new orders was smaller. In construction, the main development was a reduction in perceived uncertainty, while among consumers and in most activities, heightened expectations regarding future price increases persist.

Available high-frequency indicators for the second quarter suggest somewhat more cautious household consumption amid increased survey-based uncertainty regarding financial conditions, while signals from certain domestically oriented activities are more favourable. The real value of confirmed tax receipts in the first two months of the second quarter was 1.6% lower year-on-year, while the value of card payments was 1.7% higher, though growth was slower than in the first quarter. In April, real sales of motor vehicles increased by 4.5% year-on-year, and retail trade turnover by 2.1%.[9] In accommodation and food service activities, data on tourist overnight stays in the first two months of the second quarter also indicate continued growth, with the number of overnight stays up 7.0% year-on-year. Prospects in construction also remain favourable, as the total floor area covered by building permits for buildings increased significantly up to April this year.

The current average of model-based estimates for quarterly GDP growth in the second quarter stands at 0.3% (Figure 1.2.3, left). The estimate is below the long-term average of quarterly growth and is accompanied by pronounced uncertainty. This arises from the limited set of soft indicators, which fluctuated significantly in the first two months of the second quarter. Following a sharp decline in the economic sentiment in April, a rebound was observed in May. In addition to the highlighted uncertainty of survey-based indicators for the second quarter, the estimate is also strongly influenced by the March volume of sales in trade and services, which to a significant extent reflects one-off effects of increased fuel purchases at petrol stations prior to the announced rise in fuel prices.

Real exports and imports of goods increased year-on-year in the first quarter, despite a deterioration in the terms of trade for goods, while trade in services contracted.

The current account surplus amounted to 2.3% of GDP in the first quarter, which is 0.4 percentage points less than a year earlier. The main factor behind the decline was a larger deficit in trade in goods, which widened as a result of import volumes growing faster than export volumes, coupled with a slight deterioration in the terms of trade (Figure 1.2.3, right). Survey indicators of the competitive position on EU and non-EU markets remain unfavourable, indicating a further decline in the competitiveness of enterprises (see Box 2.1.4 for more details).

Despite weaker external trade flows in January, heightened geopolitical tensions have not yet been significantly reflected in goods trade data for the first quarter. Nominal exports of goods were up 1.4% year-on-year (real growth of 0.7%), while imports increased by 1.9% (real growth of 1.5%), mainly due to stronger flows in March. This might partly indicate an early increase in trade volumes in response to uncertainty regarding the resilience of supply chains in the coming months amid geopolitical tensions.[10]

Approximately two-thirds of the growth in goods exports was attributable to exports to EU countries. The growth was geographically dispersed, as nominal exports increased to all major trading partners except Germany and Austria.[11] The largest contribution to export growth outside the EU came from higher exports to Russia, primarily of medical and pharmaceutical products, which rose by 29% year-on-year. Medical and pharmaceutical products account for a significant share of goods exports (15%), with total exports in this category up by a tenth year-on-year in the first quarter. Exports of road vehicles also increased (by 4.8%),[12] as did exports of industrial and electrical machinery (by 3.0%).

The largest contribution to overall goods imports growth came from a 10.9% increase in imports from non-EU countries, while imports from EU countries declined by 0.5%, mainly due to lower imports of oil and oil products from Italy. The main drivers of import growth were a 8.7% increase in imports of machinery and transport equipment, with the most pronounced growth seen in road vehicles from Spain (57%) and electrical machinery and equipment from China (48%).[13] The increase in imports from China may partly be linked to stockpiling ahead of the possible introduction of new EU restrictions aimed at enhancing supply chain resilience, reducing risks associated with supply concentration, and strengthening economic security.[14]

Nominal exports of services were up 2.8% year-on-year in the first quarter, while imports increased by 3.3%. Despite these favourable trends, real exports of services declined by 2.9% and imports by 1.3%, mainly due to a pronounced price effect. The main contributors to the growth in nominal exports of services were insurance services and travel, which increased by 5.2% year-on-year. Daily data for the first two months of the second quarter indicate a further increase in travel exports, as the number of overnight stays by foreign tourists was 8.6% higher year-on-year.[15] Transport continues to account for the largest share of service exports, representing almost one-third, and remained virtually unchanged year-on-year (0.9%). On the import side, travel imports increased by 8.6%, while imports of transport services declined by 2.7%, with maritime freight transport down by one-fifth.[16] The surplus in trade in services remained similar to a year earlier, with transport services continuing to be the most important source, generating almost two-thirds of the surplus.

The primary income balance also recorded a surplus in the first quarter, similar to last year. It amounted to EUR 13 million, which was EUR 19.2 million lower year-on-year. This was mainly due to lower interest income received by the government, alongside an increase in interest expenditure. The deficit in secondary income narrowed by EUR 21 million, primarily as a result of higher net non-life insurance premiums.

The labour market remains robust, while real wage growth exceeds productivity growth.

Following last year’s contraction, employment increased by 0.4% year-on-year in the first quarter of this year (Figure 1.2.4, left). By activity, the largest contributions to growth came from predominantly public services and from professional, scientific, technical and other business activities, while the sharpest declines were recorded in manufacturing and in the combined trade, transportation, accommodation and food services activity. Seasonally adjusted data on expected employment indicate that labour demand moderated in the spring months and was only half a percentage point above the long-term average. It remained highest in construction. Nevertheless, the labour market remains tight, as reflected in persistently high labour shortages and low registered unemployment. In May, registered unemployment was 0.3% lower year-on-year, amounting to 43,060 persons, which is less than one thousand persons above the historical minimum recorded in June last year. The unemployment rates did not change significantly year-on-year; the registered unemployment rate stood at 4.6% in March, while the survey unemployment rate was 4.1% in the first quarter.

Wage growth, measured by compensation of employees per employee, was 7.5% year-on-year in the first quarter (Figure 1.2.4, right). Despite a substantial 16% increase in the minimum wage, which is analysed in detail in Box 2.2.1, wage growth was more than one percentage point lower than a year ago, due to the fading base effect from the public sector wage increase in January last year. In the private sector, wage growth stood at 7.5%, while in predominantly public services it was 7.3%. Despite the highest year-on-year productivity growth in the past four years (2.6%), which, given last year’s low base, is mainly attributable to the year-on-year increase in GDP, productivity still lagged behind real wage growth (4.9%) in the first quarter.

Inflation has accelerated primarily due to higher energy prices; services inflation, however, continues to remain elevated.

The annual growth rate of consumer prices, as measured by the HICP, increased again in May, reaching 3.8%. This was 0.4 percentage points higher than in April and 1.4 percentage points higher than in March (Figure 1.2.5, left). The acceleration over the past two months has been driven primarily by fuels, reflecting higher crude oil prices on global markets due to the outbreak of war in the Middle East. Motor and liquid fuels prices rose by 20.3% month‑on‑month in April; in May, however, amid significant volatility in wholesale prices, they declined by 2.0%.[17] However, these rates have been partly impacted by government measures related to excise duties and the CO2 contribution.[18] Total energy prices also declined slightly in May, by 1.4% month‑on‑month, while their high annual growth rate at 17.1% (15.6% in April) was supported not only by recent price increases but also by base effects. The latter stemmed mainly from fuel prices, which had been declining in the same period last year.[19]

Food prices have remained relatively stable so far, despite higher fuel prices. Their annual growth rate increased only slightly in May, to 2.0%, with monthly increases in both processed and unprocessed food not deviating from typical seasonal patterns for May. Fertiliser prices on global markets, which had surged following the energy shock, eased significantly by the end of May, mitigating the pass‑through of higher energy prices to consumer prices.[20] Nevertheless, changed conditions in the global economy have already been reflected along production chains, where increased price pressures are evident in higher prices of agricultural inputs, particularly nitrogen fertilisers, as well as in higher import prices of energy and intermediate goods.[21]

Alongside the acceleration in energy prices, core inflation, measured as the growth of prices excluding energy and food, has also strengthened. In May, it rose back to 2.3% (1.9% in April), returning to the levels of the first quarter. The decline in April was mainly attributable to the prices of other goods, particularly clothing and footwear.[22] Nevertheless, core inflation continues to be driven primarily by services prices, which were up 3.9% year‑on‑year in May. Indeed, services inflation has been hovering around these levels since late 2024, supported by robust domestic demand and strong growth in labour costs. A further persistence of services inflation is indicated by inflation momentum, which has increased by more than one percentage points over the past four months, while the annual growth rate remained relatively unchanged. Survey indicators also point to the somewhat accumulated price pressures, as they show a notable increase in the share of firms expecting a faster rise in their selling prices in the coming months (Figure 1.2.5, right). Expectations of further price increases could be driven by still robust domestic demand, the delayed pass-through of labour cost growth to final prices, and the gradual transmission of higher energy prices to other price categories.

The growth of expenditure of the consolidated general government budgetary accounts outpaced that of revenue, resulting in an increase in the deficit.

The deficit of the consolidated general government balance amounted to EUR 397 million in the first four months, which is EUR 111 million more than in the same period last year. Over the twelve-month period to April, it reached 2.6% of GDP, slightly higher than at the end of 2025 (2.5% of GDP). Most of the deficit originated from the state budget, where it amounted to EUR 420 million in the first four months. According to preliminary data up to and including May, the state budget deficit increased further, reaching EUR 890 million (compared with EUR 561 million in the same period last year).

Consolidated general government revenue was 11.4% higher year-on-year up to April. The main contributors to this growth were social security contributions, reflecting labour market conditions that are favourable for public finances and the introduction of the long-term care contribution in July 2025. Among tax revenues, the most pronounced growth was recorded in corporate income tax, due to the settlement of tax liabilities for the previous year in April. Revenue from domestic taxes on goods and services also increased, supported by growth in private consumption. Notably, value added tax revenue rose strongly, and excise duty receipts were also higher year-on-year in April. A significant contribution to overall revenue growth came from EU budget funds, which were EUR 172 million higher, mainly due to inflows from the EU Recovery and Resilience Facility (NGEU); these amounted to EUR 175 million this year, compared with none in the same period last year. In April, the tax on total assets of banks and savings banks, introduced to finance post-flood reconstruction, was also paid.

Consolidated general government expenditure increased even more rapidly than revenue, rising by 12.2%. The main driver of this growth was a significant increase in wages, which was 11.7% higher year-on-year. This reflects the gradual implementation of the wage reform, the increase in the minimum wage, growth in employment, and promotions. The impact of this year’s 0.9% wage indexation to inflation will be reflected in the May data, following the payment of April wages. Transfers to individuals and households also increased. Expenditure on pensions was 6.0% higher year-on-year, mainly due to the regular 4.2% pension indexation and an increase in the number of pensioners, while unemployment benefits also rose substantially.[23] Investment expenditure and transfers were 19.4% higher year-on-year, indicating stronger government investment activity. There was also a notable increase in current payments to other institutions performing public services that are not indirect budget users, as well as in allocations to reserves.

2Projections

After the temporary slowdown in economic growth, associated with the effects of the war in the Middle East, GDP growth will gradually strengthen from the end of 2026 over the projection horizon and stabilise above two percent in 2027 and 2028. A stronger recovery will be constrained by deteriorating external competitiveness, primarily as a result of robust growth in labour costs, despite a somewhat less tight labour market and modest employment growth. The domestic economy will thus face a combination of external and domestic cost pressures, which will again contribute to higher inflation this year and subsequently hinder its faster moderation in the ensuing period.

2.1Economic activity

GDP growth will amount to 1.9% this year, with the encouraging start to the year and the carry-over of economic activity from the previous year mitigating the effects of the situation in the Middle East. With the stabilisation of the international environment, growth will strengthen to 2.2% in 2027 and 2028.

In the short term, economic developments will be shaped by events in the Middle East. Although, according to available indicators for the second quarter, these effects are primarily manifesting as a price shock and to a lesser extent as a shock to the real economy, the projections assume that economic growth will temporarily moderate in the second and third quarters of this year. This will be mainly driven by uncertainty, which, together with higher input costs, will dampen activity also in our trading partners. Against this backdrop, net trade with foreign countries will make a negative contribution to economic activity this year, while investment will largely stagnate. Growth will thus be sustained by domestic consumption. On the government side, this will be mainly linked to the implementation of the Long-Term Care Act and the increase in employment in the government sector. Real wage growth, supported by a relatively robust labour market, will at the same time mitigate the impact of the energy shock on household purchasing power, which will also underpin the growth of private consumption. With the anticipated stabilisation of international conditions, activity in the export sector of the economy will gradually recover in 2027 and 2028, resulting in more balanced and higher GDP growth (Figure 2.1.1).

Amid heightened uncertainty and weaker consumer confidence, the growth of private consumption will lag behind the growth of disposable income this year; nevertheless, at 2.4%, it will remain relatively robust. Over the remainder of the projection horizon, developments in both components are expected to become more closely aligned, with private consumption growth rising slightly to 2.6%.

Favourable developments in private consumption dynamics at the beginning of the year masked divergences in underlying factors. While household income – supported by the lagged effect of the mandatory winter bonus and a pronounced increase in the minimum wage – continued to underpin spending, consumer confidence deteriorated slightly in February and March. Uncertainty and the energy shock further significantly deepened the decline in confidence in April and May. Together with higher inflation and pressures on disposable income, these factors are expected to constrain private consumption over the remainder of the year, during which its growth is projected to moderate. The impact on purchasing power will be more pronounced among households with lower incomes and a higher propensity to consume, as they are disproportionately affected by the increase in the prices of essential goods and services.[24]

Wage growth will continue to mitigate inflationary pressures, however, due to weaker confidence and precautionary saving, the growth in real disposable income will only partially translate into higher private consumption. In an environment of heightened uncertainty, households are expected to postpone major purchases and demand for durable goods in particular, as confirmed by our empirical estimates in Box 2.1.1. Consequently, private consumption growth is projected to reach 2.4% this year, which is 0.7 percentage points lower than the December projection. Despite tighter financing conditions,[25] consumer confidence is expected to improve over the remainder of the projection horizon, assuming a gradual easing of uncertainty. Together with further real income growth, this will accelerate private consumption growth to 2.8% next year. In 2028, private consumption growth is projected to moderate to 2.3%, in line with developments in real disposable income (Figure 2.1.2, left).

The household saving ratio is estimated to have increased to 15.5% last year, and, amid subdued growth in private consumption and continued robust growth in real disposable income, it is expected to rise further to 16.3% this year, which is 2.8 percentage points above the long-term average. This primarily reflects precautionary saving and the postponement of major purchases due to heightened uncertainty and, consequently, weaker consumer confidence. Despite the strengthening of private consumption from next year onwards, the household saving ratio will remain relatively high, as confidence is expected to recover only gradually with the easing of uncertainty, and a portion of income will continue to be allocated to saving or investment. On average over the period 2027–2028, the saving ratio is projected to stand at 15.8%, which is 2.3 percentage points above the long-term average (Figure 2.1.2, right).

Government consumption will support economic growth primarily this year, while government investment, after making a significant contribution last year, is not expected to provide further stimulus over the projection period.

Government consumption is projected to increase more strongly this year due to the implementation of long-term care and rising employment. Growth is expected to reach 2.5% on average over the projection period. With the introduction of institutional long-term care rights in December 2025 and the gradual expansion of home-based long-term care, introduced in July last year, expenditure on long-term care will increase further this year, contributing to higher government consumption. At the same time, employment growth in the general government sector continues, having strengthened further in the first quarter. In the remainder of the projection period, real growth in government consumption is expected to moderate. Nominal growth in government consumption will be high this year and next, reflecting not only expenditure on long-term care but, to an even greater extent, strong growth in compensation of employees, linked to the wage reform, further employment growth and other factors.[26] Towards the end of the projection period, as the effects of the introduction of long-term care fade and the NGEU programme concludes in 2026, growth in government consumption will slow.

General government investment is expected to have a broadly neutral impact on economic growth over the projection period, as the effects of the conclusion of the NGEU programme gradually fade. Although investment will increase further this year, its contribution to economic activity will be only slightly positive due to the high base from previous year. However, the investment-to-GDP ratio will remain close to last year’s record level, at around 5.5%. Investment growth this year will be supported by the completion of NGEU-funded projects and the usual effect of increased investment activity ahead of elections, particularly local elections. In 2027, the contribution of government investment to GDP growth will turn negative, as the effects of the NGEU programme and the pre-election period will have largely dissipated. Investment is expected to pick up again and contribute to GDP growth in 2028, supported by the anticipated accelerated absorption of funds from the EU financial perspective. Throughout the projection period, government investment will also be supported by higher defence spending, while the volume of post-flood reconstruction following the August 2023 floods will gradually decline. Real growth in government investment is projected at 0.5% this year, followed by a decline of 9.2% in 2027, and a renewed increase of 1.9% in 2028. Government investment will remain relatively high throughout the period, averaging around 5% of GDP.

Due to challenging conditions in the main export markets and heightened uncertainty, private investment is expected to decline this year, thereafter, it will recover only gradually, as cost pressures persist and financing conditions remain tight.

Following relatively robust investment activity by firms in the first quarter, the escalation of geopolitical tensions in the Middle East has once again increased uncertainty in the external environment. With more cautious expectations for the remainder of the year and a significantly negative carry-over effect from 2025, business investment is projected to fall by 1.1% this year, which will be the main contributor to the overall decline in private investment of 0.4% (Figure 2.1.3, left). The slowdown in business investment growth in the second half of the year is also confirmed by weakened survey-based confidence indicators in manufacturing in the initial months of the second quarter. Firms report lower expectations regarding production and new orders, as well as persistently lower capacity utilisation compared to the pre-pandemic period. Among the main limiting factors, they cite uncertain economic conditions, a shortage of skilled labour, and insufficient foreign demand. As a considerable share of firms report plans to invest less than last year, risks to lower-than-projected growth remain present.

Private residential investment will increase by 3.6% this year, driven by a more pronounced revival in the housing construction cycle that began at the start of the year and a favourable carry-over effect from 2025. The strengthening of residential construction is reflected in more favourable monthly data on the value of construction put in place, a higher number of building permits issued for residential buildings, and relatively stable survey-based indicators in the construction sector, despite uncertain conditions in the external environment. Accelerated housing construction will not, however, suffice to eliminate the existing imbalance between supply and demand, consequently, the growth of residential property prices will remain elevated. Demand for residential real estate continues to be supported by growth in households’ real income and investment motives.

In 2027 and 2028, the growth of private investment will strengthen, albeit at a slower pace than projected in December. An important role in this will be played by mounting pressures on the cost competitiveness of firms, stemming from the pass-through of higher energy prices along the cost chain and elevated labour costs. Owing to uncertainty, heightened inflationary pressures, and the expected tightening of monetary policy, financing conditions for firms and households will also be less favourable compared with previous years. In the final two years of the projection horizon, investment activity will be further constrained by the phasing-out of NGEU funding (Figure 2.1.3, right). Taking these factors into account, private investment growth in 2027 and 2028 will amount to 1.6% and 3.0%, respectively. Cumulatively, over the entire projection period, it will lag behind GDP growth, which poses a risk of further structural deceleration in productivity growth.

Conditions in the export sector remain challenging, and as a result, the contribution of net trade with the rest of the world to economic growth is expected to be broadly neutral over the projection period.

The export sector faces numerous challenges and heightened risks arising from weak economic activity and a further deterioration in the economic climate among key export partners,[27] persistent uncertainty in international trade, and domestic cost pressures on competitiveness. This is reflected in the export intensity of enterprises, measured by the share of net sales revenue from foreign markets in total revenue, which deteriorated significantly at the end of last year. In the first quarter of this year, it improved somewhat but remained lower than a year earlier (Figure 2.1.4, left).

Some optimism was also observed at the beginning of this year in indicators of export orders and foreign demand, although both continued to point to a weak international environment. With the conflict in the Middle East, uncertainty has increased again, and the expected recovery in the growth of foreign demand has been postponed to next year. At the same time, firms continue to report increased pressure from competitive imports, particularly from China. Since 2023, this pressure has gradually intensified, both in the EU market and in third markets, and is increasingly affecting the  competitiveness in the EU’s traditional export sectors.[28]

In these conditions, export growth in 2026 will reach 1.5% (Figure 2.1.4, right), which is 1.6 percentage points lower than the December projection and below the projected growth in foreign demand. Similarly, the import growth projection has been revised downwards by 1.5 percentage points to 2.8%, reflecting weaker domestic consumption than expected, a lower volume of investment, and a relative decline based on the import content of exports. The contribution of net trade with the rest of the world to GDP growth will thus be negative this year (–0.9 percentage points).

With the gradual stabilisation of conditions in the international environment and in line with projected movements in foreign demand, export growth is expected to accelerate to 3.3% in 2027 and to strengthen further to 3.5% in 2028. Nevertheless, the pace of market share gains over the projection period will be slower than the long-term average, as cost pressures on competitiveness will continue to restrain a stronger expansion of exports (the impact of deteriorating competitiveness on exports is examined in more detail in Box 2.1.5). With the strengthening of domestic demand and export activity, import growth will also increase, reaching 2.9% in 2027 and 3.6% in 2028 according to projections. With such developments, the net contribution of trade with the rest of the world will become positive again from 2027 onwards but will remain relatively modest.

Compared with December, the June projection for economic growth is lower by 0.3 percentage points in 2026 and by 0.2 percentage points in 2027, while in 2028 it is higher by 0.1 percentage points.

The downward revision of GDP growth for 2026 primarily reflects increased geopolitical uncertainty due to the situation in the Middle East, which is intensifying inflationary pressures and deteriorating the external environment. Compared with the December projections, these factors, together with heightened cost pressures and low capacity utilisation, are reflected mainly in a negative contribution from net exports and a decline in private investment. Following stronger growth last year and a somewhat more constrained fiscal space compared with December, lower growth in government investment is also expected this year. At the same time, a somewhat more subdued growth in private consumption is anticipated, given weaker household confidence and greater precautionary savings. Uncertain conditions regarding energy costs and supply reliability are also reflected in a changed contribution from changes in inventories (Figure 2.1.5, left).

With an improvement in the external environment, a recovery in export and business investment growth is expected in 2027, however, the growth of both components will be more modest than projected in December. As a result, the expected GDP growth is 0.2 percentage points lower than the previous projection. This is mainly due to less favourable terms of trade, including exchange rate appreciation, mounting pressures on cost competitiveness, and tighter financing conditions. The negative revision of investment and export growth will be partly offset by somewhat higher growth in private consumption, which will be stronger than in December due to an expected improvement in confidence and the unwinding of excess savings from this year. At the same time, it is expected that, from next year onwards, private consumption growth will be more in line with the growth of disposable income, which, given the projected wage developments, is somewhat higher over the projection horizon than in December. The economic growth projection for 2028 remains relatively unchanged compared with December, and its structure is largely preserved.

From a technical perspective, the revision, despite relatively robust current high frequency indicators, is mainly the result of a revision of external environment assumptions and an additional expert judgement, which is negative for the projected growth. This relates in particular to the second and third quarters of this year, when current economic growth is expected to be considerably lower than short-term model estimates. These are currently based on a limited set of soft indicators for April and May, which show significant volatility in the economic sentiment and turnover, resulting in high uncertainty in model estimates (Figure 1.2.3, left). The impact of changed assumptions and the effect of a lower carry-over from this year are also reflected in the revision of the 2027 projection (Figure 2.1.5, right).

2.2Labour market

Employment growth will be modest over the projection horizon. It will be sustained primarily by employment in the government sector.

Following last year’s decline, employment is expected to increase by 0.4% this year (Figure 2.2.1, left). The projection for the current year is 0.2 percentage points higher than in December. The main contributor to the revised estimate is the continued growth of employment in the government sector, which is projected to reach 1.4%, while in the private sector it will remain modest at 0.2%. The labour market thus continues to exhibit a divergence between developments in government and private sector employment, a trend that is expected to persist throughout the projection period. Employment growth remains primarily constrained by labour shortages linked to unfavourable demographic trends, while in the private sector it is also significantly affected by weaker demand for labour, especially in manufacturing. Given the ongoing structural constraints in the labour market, we assume relatively favourable productivity growth over the projection horizon. However, due to slower economic growth and higher employment, productivity this year will be somewhat lower than anticipated in December, but is expected to recover towards the end of the projection period and stabilise at 2.0% (Figure 2.2.1, right). This will mainly reflect cyclical factors associated with the expected strengthening of economic activity and exports.

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

The survey-based unemployment rate will stand at 4.0% this year, which is slightly higher than in previous years (Figure 2.2.1, left). Over the remainder of the projection period, it is expected to gradually decline towards 3.8% in 2028. The historically low level is also confirmed by registered unemployment, which in recent years has hovered around 45,000 persons. This reflects the persistent shortage of labour and the deepening of structural imbalances in the Slovenian labour market, resulting from the fact that more employees are retiring than there are young people entering the labour force.[54]

Wage growth will remain elevated this year, primarily due to the increase in the minimum wage, but is expected to stabilise at more sustainable levels over the projection horizon.

Wage growth, as measured by compensation of employees per employee, will remain relatively high this year, reaching 7.2% (Figure 2.2.2, left). This is 2.1 percentage points above the December projection, mainly due to the higher increase in the minimum wage, which rose by 16% this year, significantly exceeding previous expectations. In addition to the direct effect, this increase is also partially transmitted to overall wage growth through spillover effects (Box 2.2.1). The continued implementation of the public sector wage reform will also contribute to strong growth, resulting in wage growth in the government sector outpacing that in the private sector throughout the projection period. In the government sector, wage growth will reach 7.9% this year and will gradually moderate over the remainder of the projection horizon. In the private sector, it will amount to 6.9% this year and then stabilise at around 4.2%, a level more consistent with long-term sustainable labour cost developments as defined by productivity growth. With the persistent divergence between real wage growth and productivity, the share of compensation of employees in GDP will increase again this year, approaching 54.0%, the highest level to date (Figure 2.2.2, right).

2.3Inflation

Headline inflation is expected to accelerate to 3.6% in 2026, mainly due to a stronger growth in energy prices and a strengthening of core inflation.

Headline inflation, as measured by the HICP, reached 2.5% last year and remained close to this level in the first quarter of this year, before starting to accelerate. The main driver of the strengthening were higher wholesale energy prices following the outbreak of war in the Middle East, with government measures on motor fuels partly mitigating the impact on retail prices. Going forward, the annual growth rate of energy prices is expected to remain elevated, however, the contribution of motor fuels is expected to be partly offset by higher contribution from electricity prices. In addition to energy prices, both core inflation components (other goods and services) will support higher headline inflation this year, while food inflation will be more subdued, mainly due to base effects stemming from last year’s strong increase. Headline inflation is thus projected to stand at 3.6% in 2026 (Figure 2.3.1, left).

Over the remainder of the projection horizon, inflation is expected to gradually moderate, decelerating to 2.3% in 2027 before reaching 2.0% in 2028. The slowdown will primarily reflect the anticipated decline in oil prices as conditions in the Middle East stabilise, as well as somewhat lower core inflation. Nevertheless, a faster convergence of inflation towards the monetary policy target will be held back by services inflation, which will remain elevated due to the continued pass‑through of high labour costs into consumer prices. Additionally, the indirect effects of higher energy prices on non‑energy components of inflation (Box 2.3.1) will also prevent a more rapid easing of headline inflation, particularly those on food inflation. By contrast, the growth of prices for other goods is expected to remain subdued throughout the projection period.

As regards to the euro area average, headline inflation in Slovenia is expected to exceed it by 0.6 percentage points this year, before converging in 2027 and 2028. Core inflation is projected to remain above the euro area average throughout the projection horizon, with food inflation also exceeding it in 2027 and 2028. By contrast, energy price growth will exceed the euro area average this year but is expected to fall short of it over the next two years.[61]

Energy price developments will depend on the effects of the war in the Middle East on global energy markets.

This year, energy prices will be the main driver of heightened headline inflation, following declines in the previous two years. According to our projections, their annual growth rate is expected to reach 11.1% this year as a result of the outbreak of war in the Middle East, contributing 1.3 percentage points to headline inflation. Government measures to reduce levies on fuel prices have partly mitigated this effect, lowering energy inflation by 5.1 percentage points and headline inflation by 0.6 percentage points.

Energy price developments will also be affected by electricity prices and related changes in network charge billing. This year, electricity price growth will be supported by the gradual transition to the new tariff rate system under the 50‑70‑90 model for the most expensive time block. This model provides a 30% reduction for the most expensive time block during the high season of 2026/27, i.e. between November 2026 and February 2027, following a 50% reduction between November 2025 and February 2026. Additional upward effects are expected following the expiry of the 50% reduction in the CHP and renewables contribution during the high season of 2025/26 and from the updated pricelist for network charge tariff rates as of March this year. Over the remainder of the projection horizon, energy prices are expected to decline as conditions in the Middle East are expected to gradually normalise. According to our projections, energy prices will be 2.6% and 2.1% lower year-on-year in 2027 and 2028, respectively, however, they will remain above their pre‑war levels.

Food inflation is projected to decelerate to 1.9% this year, down from 4.9% last year. This decline is mainly attributable to base effects stemming from last year’s continued monthly increases, particularly in the first half of the year. By subcomponent, the slowdown will primarily reflect lower growth in processed food prices, while the growth of unprocessed food prices will also be somewhat lower than last year. Further easing of inflationary pressures is expected to be gradual, reflecting the ongoing pass‑through of higher energy and fertiliser costs along the production and supply chain. Moreover, food price developments over the projection horizon will also be influenced by trends in wholesale food commodity prices and labour cost growth. Accordingly, food inflation is projected at 4.0% and 3.3% year‑on‑year in 2027 and 2028, respectively.

Core inflation is expected to remain predominantly driven by services inflation, supported by persistently strong labour cost growth.

In 2026, core inflation, measured as HICP inflation excluding energy and food prices, is projected to increase to 2.8%, up from 2.4% in the previous year. The increase will be broad‑based, with higher growth in both services prices and prices of other goods contributing to a similar extent. Core inflation is expected to remain above the monetary policy target also over the remainder of the projection horizon: it is projected at 2.6% in 2027, before moderating to 2.2% in 2028 (Figure 2.3.1, right).

Core inflation will remain driven primarily by services prices throughout the entire projection horizon. Services inflation is expected to remain elevated, following an increase of 3.8% in the previous year. This largely reflects the pass-through of higher labour costs to final prices, particularly in publicly provided and regulated services, as well as indirect effects from higher energy prices, notably in transport and tourism-related services. Accordingly, services inflation is expected to reach 4.2% in 2026, before moderating to 3.9% and 3.4% in 2027 and 2028, respectively. The gradual easing will be partly supported by a moderation in unit labour cost growth, reflecting slower wage growth as well as recovery in productivity growth.

The growth of prices for other goods is projected to strengthen to 1.1% this year, up from 0.6% last year. On the supply side, this reflects higher input costs resulting from the energy shock, while on the demand side the expected recovery in private consumption and investment activity will support higher price growth, particularly for durable goods. Accordingly, the growth of prices for other goods is projected to average 0.8% in the following two years.

A decomposition of core inflation by production factors suggests that inflationary pressures over the projection horizon will be driven primarily by labour costs, supported by a substantial increase in the minimum wage implemented in January this year.[62] In 2027 and 2028, growth in unit profits, reflecting the anticipated recovery in economic activity, will also contribute. However, gradual moderation of core inflation will be supported by a recovery in labour productivity. Meanwhile, a relatively strong growth in GDP deflator is expected to persist, largely owing to developments in the government consumption deflator, reflecting robust wage growth in the public sector (Figure 2.3.2, left).

Compared with the December projection, headline inflation is now expected to be higher in 2026 and 2027, while the projection for 2028 remains unchanged.

Headline inflation this year is expected to be 1.3 percentage points higher than in the December projection. The revision mainly reflects higher energy inflation, driven by developments in crude oil prices and, to a lesser extent, wholesale gas and electricity prices following the outbreak of conflict in the Middle East. The upward revision to headline inflation also reflects a higher projection for core inflation, which is linked to stronger labour cost growth, notably due to the unexpectedly large increase in the minimum wage at the beginning of the year and weaker productivity growth compared with previous projections. At the same time, a strong increase in headline inflation this year is partly offset by a downward revision to food inflation, reflecting price growths in the first part of the year, which were below the December projection. Over the remainder of the projection horizon, energy inflation is expected to be lower than in the December projection, owing to base effects stemming from the strong upward revision this year, while prices of non‑energy components of the consumer basket are expected to grow more strongly. This primarily reflects indirect effects of higher wholesale energy prices and the pass‑through of higher labour costs growth into final prices (Figure 2.3.2, right and Box 2.3.1).

3Risks and Uncertainties

Risks to economic growth are predominantly tilted to the downside over the projection horizon, while risks to inflation remain skewed to the upside.

Among external risks, the potential persistence or escalation of the conflict in the Middle East stands out most prominently. This could be reflected in higher energy prices and their increasingly pronounced pass-through to headline inflation, disruptions in supply chains, and heightened macroeconomic and financial uncertainty. These factors would reduce the purchasing power of households and affect their decisions regarding major purchases. At the same time, less favourable conditions in the international environment and increased uncertainty would further restrain corporate investment and international trade. The macroeconomic effects of such a scenario are presented in more detail in Section 3.1. In addition to geopolitical tensions, renewed uncertainty regarding trade policies could also affect the export sector of the economy during the projection period. The trade agreement between the United States and the EU remains conditional on official ratification by the European Parliament, while its implementation is subject to suspension clauses in the event of non-compliance with agreed tariff rates or territorial threats to EU Member States. The introduction of suspension clauses was a direct response by the European Parliament to the US’s announced threat of higher tariffs and the territorial appropriation of Greenland in January this year.[66] In addition to geopolitical uncertainty, macroeconomic projections have been prepared in a period of increased volatility and high valuations in global financial markets. Sudden revaluations of financial or real assets could affect the domestic macroeconomic environment through increased uncertainty in the financial system, the deterioration of balance sheets and corporate access to finance, and a decline in household wealth. The latter channel is the focus of Box 3.1.1, where our baseline analysis indicates a relatively limited direct exposure of Slovenian households to asset revaluations and a limited impact on consumption.

In addition to external risks, the impact of domestic structural factors on economic growth and inflation could also intensify during the projection period. These factors primarily stem from pressures on labour productivity growth, adverse demographic trends, and the resulting contraction of the available labour force. This is reflected in the strong growth of unit labour costs, which will, over the projection period – particularly this year – contribute to a more pronounced deterioration in the cost competitiveness of the economy compared with other EU countries. The decline in competitiveness will already be limiting investment and export growth during the projection period, as discussed in more detail in Boxes 2.1.3 and 2.1.4. Cost pressures could be further exacerbated by slower labour productivity growth, also as a consequence of previously weak investment activity, and by a stronger pass-through of inflation into nominal wage growth. This could occur in the event of prolonged elevated inflation, especially if geopolitical risks materialise and energy prices increase further. The indirect effects of higher energy prices and their pass-through to other price categories are analysed in Box 2.3.1.

The materialisation of the risks described could require more decisive action by the state or fiscal policy to mitigate macroeconomic consequences. However, following the rapid increase in the deficit last year and with the expected breach of the reference threshold of 3% of GDP during the projection period, fiscal space is diminishing.[67] The projections do not take into account the impact of the Act on Emergency Measures for the Development of Slovenia, adopted in May, as its implementation remains uncertain due to the possibility of a referendum if its admissibility is confirmed by the Constitutional Court. The measures contained in the Act, aimed at increasing disposable income, could stimulate economic growth during the projection period. This could be further supported by a faster increase in defence expenditure, associated with more consistent fulfilment of NATO commitments and geopolitical circumstances. However, such measures would also place additional strain on public finances and increase the deviation of the deficit above the reference threshold of 3% of GDP. This could raise the financing costs for the state and other entities in the economy, intensify pressures to adjust public expenditure, and reduce the capacity to respond to potential new shocks. Consequently, the medium-term effects on economic growth could be negative. The impact on inflation remains more uncertain, as the disinflationary effects of weaker economic activity could be offset by new price shocks, to which the state would find it more difficult to respond due to reduced fiscal space.

3.1Alternative projection scenario

An escalation of the war in the Middle East would dampen economic activity and intensify price growth over the projection horizon.

The outlook for economic activity in Slovenia is highly contingent on the evolution of the conflict in the Middle East. The baseline projection assumes a gradual easing of tensions and the restoration of maritime traffic through the Strait of Hormuz, which is expected to stabilise conditions in wholesale commodity markets.

The effects of a potential persistence or escalation of geopolitical tensions on the Slovenian economy are assessed in the alternative projection scenario. This scenario envisages several transmission channels through which a longer lasting and more severe shock would spill over into the Slovenian economy. These are summarised in Table 3.1.1. The first channel relates to higher wholesale commodity prices, particularly oil. The alternative scenario is based on the 95th percentile of the distribution of market expectations for oil price developments, which, from the third quarter of this year onwards, assumes a price level that is approximately 60% higher than in the baseline projection. In the event of such a price increase, we also assume a more pronounced pass‑through of cost pressures to other price categories. The impact on headline inflation is estimated based on the upper, one standard deviation confidence interval of model responses, as evaluated in Box 2.3.1.

A protracted conflict and unstable energy markets would also result in prolonged uncertainty in the global environment, as measured by the volatility index (VIX) on financial markets, which would rise by 14 index points and remain above the baseline projection until mid‑2027. This, together with higher production costs, would affect international trade, the volume of which would be almost 2% lower than in the baseline scenario. Increased macroeconomic and financial risk would also translate into tighter financing conditions. In the alternative scenario, the assumed lending rates for corporates and households are approximately 10 basis points higher.

In addition to weaker foreign demand and tighter financial conditions, higher uncertainty would also directly affect domestic demand through the postponement of investment. The direct effect of uncertainty on private investment is estimated using a satellite model.[68] Furthermore, the alternative scenario, in addition to the price effects of the commodity shock, also considers the impact on the productive capacity of the economy.[69]

Should the alternative scenario materialise, the average annual growth of economic activity over the projection horizon would be 0.4 percentage points lower, while headline inflation would be 1.0 percentage point higher. The impact would be most pronounced in 2027 before gradually fading in 2028 (Figure 3.1.1).

The scenario envisages a broad‑based slowdown in economic activity. All factors would contribute to this, in particular lower domestic demand amid heightened uncertainty in financial markets and a cooling of external demand. In 2027, growth would be further dampened by price pressures linked to higher wholesale prices of energy and food, with overall GDP growth being 0.9 percentage points lower than in the baseline projection. Over the projection horizon, economic activity would also be increasingly affected by reduced productive capacity due to persistently higher prices and lower availability of energy inputs in production. At the same time, the higher inflation throughout the projection horizon would mainly stem from the pass‑through of higher wholesale prices of energy and food into final prices, and, towards the end of the horizon, also from production constraints. At the same time, a more pronounced increase in price growth would be prevented by the disinflationary effects of cooling domestic and foreign demand. By contrast, the impact of tighter financial conditions and the depreciation of the euro exchange rate is, in our assessment, limited (Figure 3.1.1).

4Comparison Across Institutions

Compared with the median of projections from selected international institutions, Banka Slovenije expects, on average, GDP growth to be 0.1 percentage point lower in the period 2026–2028, while the projected consumer price growth is on average 0.1 percentage point higher than the median.

The latest available projections of economic growth for the period 2026–2028 indicate similar expectations among international institutions regarding developments in economic activity (Figure 4.1, left). For the current year, institutions expect somewhat less favourable economic prospects compared with previous projections, mainly due to heightened geopolitical uncertainty related to the situation in the Middle East. With the gradual stabilisation of the international environment in the coming years, most institutions, with the exception of the GZS and WIIW, expect economic activity to grow by around 2.2%, which is slightly below the estimated growth rate of the Slovenian economy’s production potential. The highest economic growth in 2026 is projected by Consensus, EBRD, GZS, IMF and UMAR, all with projections of 2.0%. Banka Slovenije's projection, which, like those of the EC and the OECD, stands at 1.9%, is 0.1 percentage point below the median of all projections for the current year. The lowest economic growth is projected by WIIW, at 1.7%.

For 2027, WIIW expects the highest growth in economic activity, at 2.4%, which is 0.2 percentage point above the median of all projections for the year in question. This is followed by the EC, Banka Slovenije, EBRD, OECD, Consensus and IMF, with projections of 2.3%, 2.2% and 2.1%, respectively. Banka Slovenije' projection is equal to the median of all projections, which stands at 2.2%. The lowest GDP growth is projected by UMAR and GZS, at 2.0% and 1.8%, respectively.

For 2028, economic growth projections are available for four institutions. Banka Slovenije's projection, at 2.2%, is equal to the median of all projections for the year in question.

Most institutions, with the exception of UMAR, expect a more pronounced acceleration of inflation in 2026 (Figure 4.1, right). This will be driven mainly by higher energy prices, particularly oil, the effects of which will be partially transmitted to other components of inflation in the coming years. As a result, the median rate of consumer price growth will remain somewhat above the monetary policy target. The highest inflation in the current year is projected by Banka Slovenije, at 3.6%, which is 0.5 percentage point above the median of all projections. This is followed by the EC, OECD, Consensus and GZS, with projections of 3.5%, 3.3% and 3.1%, respectively, while the lowest consumer price growth is expected by WIIW, IMF and UMAR, at 3.0%, 2.9% and 2.5%, respectively.

For 2027, the highest inflation is projected by GZS, OECD and the EC, at 2.8%, 2.6% and 2.5%, respectively. This is followed by Consensus, Banka Slovenije, WIIW and UMAR, with projections of 2.4%, 2.3% and 2.2%. Banka Slovenije's projection is equal to the median of all projections for the year in question, which stands at 2.3%. The lowest consumer price growth is projected by the IMF, at 2.1%.

For 2028, inflation projections are also available for four institutions. The highest inflation is expected by the IMF (2.3%), and the lowest by Banka Slovenije (2.0%), which is 0.1 percentage point below the median of all projections for the year in question.

5Statistical Appendix

Table 5.1: Key macroeconomic indicators at the monthly level for Slovenia

Sources: SURS, Banka Slovenije, Ministry of Finance, Banka Slovenije calculations.

Notes: The data in the table are unadjusted, except for the sentiment indicators, where the data are seasonally and working-day adjusted. The monthly activity indicators in industry, construction and services are given in real terms. Owing to a change in data source, the series for average wages before 2023 were adjusted based on the growth rates in previous series. (1) HICP deflator. (2) Inflation excluding energy, food, alcohol and tobacco. (3) Consolidated position of the state budget, local government budgets, pension and disability insurance subsector, and compulsory health insurance subsector, according to the principle of paid realisation.

6List of Abbreviations