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Economic growth expected to reach 2.4% this year; it will be driven by exports and investment
Slovenia recorded relatively strong economic growth in 2014, at 2.6%; the labour market situation also improved. With the improvement in the international environment, stabilisation of financial markets in the euro area and following economic policy measures adopted in the last few years, economic growth in 2014 was the strongest since the beginning of the economic crisis. Exports increased significantly due to higher competitiveness, coupled with stronger foreign demand. Investment also rose markedly; public investment in infrastructure was up due to the accelerated absorption of EU funds, while amid higher activity and more stable lending conditions, positive trends were also observed in private investment. Last year, employment rose for the first time since the beginning of the crisis, being up in most private-sector activities. During the year, the number of unemployed steadily decreased as more people found work and fewer became unemployed. The improvement in labour market conditions and a concurrent increase in earnings and other household receipts led to modest growth in private consumption.
The Spring Forecast is based on favourable developments in 2014 and assumes improvement in the international environment and a further implementation of economic policy measures for stabilising the situation in Slovenia. International institutions project higher economic growth in the euro area for this year and stable conditions on financial markets; the forecast also takes into account a continuation of favourable terms of trade. Furthermore, we have also assumed a continuation of fiscal consolidation measures and banking system restructuring, along with the structural adjustments announced in the development planning documents.
GDP will expand by 2.4% in 2015, again mainly owing to strong growth in exports and investment activity. Export growth will remain robust (at 5.6%), due to the faster recovery in most of Slovenia’s main trading partners, as well as to further gains in competitiveness. The increase in investment (by 4.8%) in 2015 will be similar to last year. Public investment will again rise in 2015 owing to the absorption of EU funds, albeit slightly less than last year; private investment in machinery and equipment will also expand. Amid higher capacity utilisation, private investment funding will be possible due to better business results, especially in the export-oriented part of the economy, while further deleveraging will open up possibilities for borrowing from the highly liquid banking sector. A further increase in employment, a decline in unemployment, and higher disposable income will boost consumer confidence. Private consumption is therefore projected to rise by 1.1%. Amid increased investment funded from public sources, expenditure on government consumption will decline this year, as fiscal consolidation will continue with similar measures as in 2014. Government consumption will thus fall (-0.4%) for the fifth consecutive year.
In 2016 and 2017, economic growth will hover around 2%, as growth in investment financed by EU funds is expected to slow at the transition to the new financial perspective. Positive impulses from the international environment are expected to continue in the next two years. We also anticipate further progress in correcting macroeconomic imbalances in both the entire euro area and Slovenia, with the exception of the current account surplus, which will remain high particularly as a result of the ongoing deleveraging in the Slovenian corporate sector. This will continue to be a major factor inhibiting a faster recovery. Exports will remain the key driver of growth. Growth in private consumption will gradually pick up, reflecting higher wage bill growth amid the continued recovery on the labour market. Investment volume will drop in 2016, with public investment projected to fall considerably amid a further increase in private investment. Experience shows that after the expiry of access to EU funds under the previous perspective, it is not possible to reach the same absorption rate in the first years of the new financial perspective. Government consumption in the same period will continue to be marked by the ongoing fiscal consolidation.
Amid higher economic activity, employment will continue to increase in 2015–2017, while the number of registered unemployed will gradually decline. In 2015, employment will rise further (by 0.8%), but due to the uncertainty about the recovery, a large share of people will still be hired through labour agencies. In 2015 as a whole, the number of unemployed will fall to 114,300, which is approximately 6,000 less than in 2014. Similar labour market trends will also be recorded in 2016 and 2017. In addition to higher economic activity, they will be increasingly marked by demographic changes. According to demographic projections, the number of working-age people will be falling by around 10,000 per year in the next few years, while the number of people over 65 will be rising by a similar figure.
In 2015, gross earnings will increase by 1.1%; over the entire forecasting period, their growth will stem from rises in both private and public sectors. As the strengthening of economic activity will be comparable to that of last year, the growth in earnings will also remain similar in 2015. Its increase in the private sector will reflect growth in the majority of activities, but a larger spill-over of higher productivity into earnings will be prevented by companies’ efforts to maintain a competitive position and the still high unemployment. Growth in average earnings in the public sector will also remain similar to that in 2014, due to the extension of the majority of measures for limiting the growth of earnings in the general government sector. In 2016 and 2017, nominal growth in earnings will increase in both the private and the public sector. It will be underpinned by a further recovery in economic activity and productivity and lower pressures from the labour market, while nominal growth in the general government sector will be due to the already agreed payments of regular promotions. Amid anticipated deflation, in 2015 real growth in earnings will be somewhat higher than last year, while in 2016 and 2017 it will be similar to last year’s due to renewed price growth.
The general price level in 2015 as a whole will be lower than last year (-0.2%); in the next two years, inflation will be below the ECB’s target of 2.0%. In 2015, the movement of prices will continue to be significantly impacted by the negative contribution of prices of energy and, partly, food. Moreover, the decline in the year as a whole will also continue to reflect the adjustment of relative prices, as a further reduction in unit labour costs will also ease the upward pressure on prices. As domestic demand will remain subdued, prices will fall by 0.2% this year. Reflecting the recovery of economic activity and rising oil prices, prices are expected to increase gradually in 2016 and 2017, but with economic activity still below the pre-crisis level and amid further corporate deleveraging coupled with weak domestic demand, the increase will be below 2%.
The surplus of the current account of the balance of payments, which in 2014 was the largest on record, will remain at a similarly high level in 2015–2017. The current account has been in surplus since 2011. The surplus was the largest in 2014 (5.9% of GDP) and will remain at a similar level in 2015. It will continue to reflect primarily the deleveraging process in the private sector. This year’s increase in the excess of savings over investment in the private sector will again be due to the weak investment activity of this sector, though it is also related to limited demand by highly indebted companies for new sources of funding for investment and to banks being cautious about granting loans. Particularly in the past few years, the faster growth of exports over imports is estimated to have also been due to gains in the tradable sector competitiveness, which will continue to improve in 2015 and, to some extent, the next two years. The current account surplus will thus remain high in 2016 and 2017.
In view of the strong GDP growth in 2014 and a higher forecast, potential GDP growth is also expected to increase and the relatively wide negative output gap will gradually narrow. From its lowest level in 2013, potential GDP growth will rise over 1% in the forecasting period. This is still significantly lower than before the crisis, the main reasons being lower contributions of capital and total factor productivity. The output gap, i.e. the difference between actual and potential GDP, will thus be narrowing gradually over the coming years, according to IMAD estimates.
As the recovery in economic activity and the labour market situation remain fragile, the baseline forecast is associated with downside risks, but these are easing in comparison with previous forecasts. International economic activity is still fairly volatile; moreover, certain unconventional measures with uncertain effects are being prepared or have just been launched (e.g. quantitative easing by the ECB and the Investment Plan of the European Commission). Forecasts by international institutions regarding GDP growth have otherwise improved in the past few months. Were the aforementioned measures to be successfully implemented, the economic recovery in Slovenia’s main trading partners in the EU could be even faster than currently foreseen. Consequently, we estimate that the risks from the international environment are more balanced than at the time when previous forecasts were prepared. The same applies to domestic risks: with more favourable impacts from the international environment, the movements that make the largest contribution to GDP growth could strengthen more than expected in the baseline forecast. On the other hand, the main risk arises from the discrepancy between the commitments regarding fiscal consolidation and the still insufficiently defined measures for achieving these goals.