Spring Forecast of Economic Trends 2023: Economic growth will weaken significantly this year, but will still be higher than expected in the autumn; inflation is gradually easing, but will remain relatively high in the first few months of this year
Since autumn, uncertainty about energy supply and prices started to recede and the outlook for economic growth in Slovenia’s main trading partners has improved accordingly, although it will remain significantly lower this year and in the next two years than last year. Economic growth in Slovenia is also expected to slow significantly this year (from 5.4% last year to 1.8%), but will exceed our expectations from autumn (1.4%). We expect investment growth to remain moderate, supported by public and EU funds, and exports and private consumption to show weak growth before picking up in the second half of the year. We expect inflation to moderate gradually this year, but to remain relatively high in the first few months of this year. In the absence of external shocks, it will continue to gradually weaken next year and could only decline towards 2% after 2024. Growth in employment and decline in unemployment will moderate this year, but severe labour shortages will not allow for stronger employment growth over the next two years. Risks to the forecast are less pronounced and more balanced than a few months ago, given the lower uncertainty in the international environment. Nevertheless, uncertainty remains high and is related mainly to the course of the war in Ukraine and the energy market conditions. Downside risks to the forecast include possible persistence of inflation at high levels, the impact of climate change, and geopolitical and epidemiological conditions. However, there are also some upside risks to the baseline projections of economic growth at global, EU and national level in the event of faster deceleration of inflation or higher private consumption. A more effective absorption of the full package of EU funds and fiscal effects of reform measures could also have a positive impact on economic growth.
In the Spring Forecast, prepared by the Institute of Macroeconomic Analysis and Development (IMAD) in the second half of February, GDP growth in 2023 is projected at 1.8%. “At the beginning of this year, confidence indicators were still at low levels, with signals from the international environment pointing to significantly lower uncertainty about energy supply and energy prices, and a gradual improvement in the outlook compared to the autumn forecasts. Data on GDP growth in the fourth quarter of last year are also encouraging. In Slovenia and the euro area, GDP growth was slightly above expectations, mainly due to the resilience of the economies and the impact of the agreements and measures to mitigate the energy crisis on confidence indicators and the moderation in energy prices. In addition to the international economic environment, fiscal stimulus will also have an impact on economic activity in Slovenia this year”, commented Maja Bednaš, Director of IMAD, on the forecast economic growth. We expect investment growth to remain moderate this year, supported by public and EU funds, and private consumption and exports to show weak growth before picking up in the second half of the year. Growth in external trade and the export sector will slow this year in line with the slowdown in economic growth in our main trading partners and continued cost pressures, which have been easing in the international environment. In manufacturing, high-technology industries will continue to be the main driver of growth, while we expect output to decline, especially in the more energy-intensive industries. After a strong recovery from the epidemic, we expect a slowdown in services trade growth, especially in tourism-related activities. Growth in imports of goods will weaken more than that of exports this year, mainly due to a sharper slowdown in domestic (especially private) consumption. We expect continued growth in investment in buildings and constructions, supported by a further increase in government investment, also related to the absorption of EU funds, and a further increase in housing investment. Private investment activity will be lower in 2023 as a whole than last year due to lower capacity utilisation in manufacturing, rising interest rates and continued uncertainty. Compared to last year, which was still marked by a strong recovery from the epidemic, growth in private consumption will slow markedly this year. “Relatively high inflation, especially in the first half of the year, and tighter credit conditions will continue to weaken household purchasing power and hamper faster consumption growth. Private consumption growth, which will be modest, will be supported by high employment and moderate wage growth, a somewhat lower (albeit still high) current savings rate, and government measures to mitigate the rise in energy prices”, explained Maja Bednaš. Growth in government consumption will be similarly subdued in 2023 as it was in 2022.
In the next two years, GDP growth is expected to return to slightly higher levels (2.5% in 2024 and 2.6% in 2025). Higher growth in exports and related activities will follow higher growth in external demand, and investment in machinery and equipment will also recover. In 2024, the volume of government investment is expected to decline, mainly related to the absorption cycle of EU funds. Private consumption growth will strengthen, amid higher real disposable income growth and a slightly higher propensity to save, which will, however, remain lower than before the epidemic. Government consumption growth will strengthen, mainly due to continued growth in health expenditure, also related to the planned implementation of the long-term care system.
This year, employment will continue to grow and unemployment will decline, although this will be more pronounced in the first half of the year, while severe labour shortages will not allow for a more substantial growth in employment in the next two years. Demographic trends, i.e. the long-term decline in the population aged 15–64, will also be a factor limiting growth in value added. Growth in the average real gross wage will be positive again this year and will strengthen towards the end of the forecast horizon. In the private sector, average wage growth will be affected by continued labour market pressures in the face of labour shortages and, to a considerable extent, by the increase in the minimum wage in January. The relatively high wage growth in the public sector will also be influenced by the implementation of last year’s agreement with the public sector unions. The forecast for gross wage growth is subject to significant risks related to labour market pressures and the announced reform of the public sector wage system after 2023, the impact of which on wage growth cannot be accurately assessed at this stage.
We expect inflation to moderate gradually and to only gradually decline towards 2% after 2024. “Higher service prices will still contribute significantly to inflation this year, and the contribution of food prices will also remain relatively high, although growth in food prices is expected to ease gradually. The contribution of energy prices is expected to be smaller this year in the absence of external shocks and the increase in non-energy industrial goods prices is also expected to moderate gradually”, commented Maja Bednaš, Director of IMAD, on the projected price developments. As price increases gradually moderate, inflation is expected to be 5.1% at the end of 2023 and average 7.1% in the year as a whole, mainly due to the high level at the beginning of the year. For next year, we expect inflation to weaken further in the absence of external shocks, falling below 3% by the end of the year, supported by monetary policy measures.
Uncertainty in the international environment is lower than in the autumn, but remains high and is related mainly to the course of the war in Ukraine and the energy market conditions. The related risks to the forecast are therefore less pronounced and more balanced than a few months ago. The downside risk to economic growth is also related to a possible persistence of high inflation, which could lead to an acceleration of monetary tightening. Other downside risks to economic activity at the global level are related to economic activity in China, the impact of climate change, social unrest amid high energy and food prices, and geopolitical and epidemiological conditions. However, there are also some upside risks to the baseline projections of economic growth at global, EU and national level. A faster-than-expected decline in inflation would lead to less severe monetary policy tightening, which would have a positive impact on economic activity. International institutions also cite higher private consumption, boosted by the use of savings accumulated during the pandemic, as a possible reason for the higher growth. A more effective absorption of the full package of EU funds, both in Slovenia and in our main trading partners, would also have a positive impact on economic growth, providing an opportunity to strengthen the development content.