OECD Economic Outlook, Volume 2024 Issue 1

Slovenia

GDP growth is projected to pick up to 2.3% in 2024 and 2.7% in 2025, with a recovery in domestic and external demand. Private consumption will be supported by a tight labour market and increasing real incomes as inflationary pressures slowly recede. Government spending on reconstruction following the devastating floods in 2023 as well as the inflow of EU funds will sustain investment growth.

Fiscal policy will be expansionary in 2024 due to higher reconstruction spending, before tightening in 2025. Structural measures include a gradual increase in spending on long-term care, reflecting spending pressures from ageing, reaching 1% of GDP in 2026. Further reforms are needed in the pension and health‑care system to ensure fiscal sustainability in the medium- to longer term.

The economy remains resilient

Economic activity expanded more than expected in the last quarter of 2023, driven by investment and government spending following the devastating floods in summer 2023. The economic expansion continued in February 2024, with industrial production rising by 3.3% month-on-month. In contrast, non‑food retail trade turnover (without automotive fuels) decreased by 0.3% month-on-month in February. The labour market remains tight with an unemployment rate of 3.1% in February. The tight labour market is reflected in strong wage growth. In the fourth quarter of 2023, labour costs per hour worked grew by 12.1% year-on-year. Wage pressures contributed to high core inflation of 4% in March 2024. Headline inflation declined from its peak of 11.7% in July 2022 to 3.4% in March 2024, reflecting lower growth of energy and food prices.

Slovenia: Activity and inflation, labour market indicators

1. Harmonised consumer price inflation.

Source: Statistics Slovenia; OECD Economic Outlook 115 database; OECD Main Economic Indicators database; Eurostat Harmonised index of consumer prices (HICP) database; and OECD calculations.

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Slovenia: Demand, output and prices

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Exports have strengthened on the back of improving external demand. In January 2024, year‑on‑year real export growth turned positive after being negative in 2023. Euro area monetary policy tightening is being transmitted into tighter financial conditions with impacts on residential and business investment. Credit growth remains weak, although it has reversed its previous downward trend: Loans to the non-banking sector grew by 0.6% year-on-year in February.

Fiscal policy will be expansionary in 2024

The fiscal policy stance was tightened in 2023 with the fiscal deficit moderating to 2.5% of GDP, reflecting a lower-than-expected implementation of post-flood reconstruction spending and lower spending on energy support measures. The government extended the cap on gas prices for households and small business until spring 2024, albeit at a lower level, reflecting lower market prices and the cap on electricity prices until the end of 2024. The government also announced flood recovery support of 2% of GDP in 2024 and 0.8% of GDP in 2025. In addition, structural measures include an increase in spending on long-term care by 0.2% of GDP in 2025 and 1% of GDP in 2026 due to reforms that will introduce payments for institutional long-term care for the elderly. This will be funded by a 2 percentage points increase in the social security contribution rate. As a result, fiscal policy is projected to turn expansionary in 2024 before tightening in 2025. With core inflation above the euro area level, a less restrictive ECB monetary policy stance may call for continued fiscal tightening in Slovenia.

Growth is set to strengthen

Growth is projected to rise to 2.3% in 2024 on the back of recovering domestic and external demand. Private consumption will be supported by rising real incomes as inflation slowly recedes, although disinflation will be hampered by the expansionary fiscal stance. Government spending on post-flood reconstruction and the inflow of EU funds will sustain investment growth. The labour market will remain tight, with historically low unemployment contributing to strong wage growth. Wage pressures will slow disinflation, despite the fall in energy prices. Growth will pick up to 2.7% in 2025 as inflation pressures abate and external demand improves. Downside risks include stronger than expected wage growth, which could keep inflationary pressures elevated for longer. Higher labour costs could further weaken competitiveness with negative effects on export activity. In addition, skill shortages could slow the post-flood reconstruction, lowering investment activity. On the upside, stronger immigration could reduce labour shortages and help lower wage pressures.

Fiscal consolidation and structural reforms would enable more sustainable growth

Continued fiscal consolidation is needed to restore fiscal buffers and make space for post-flood reconstruction spending without slowing the disinflation process. In the medium term, further reforms are needed in the pension and health-care system to address ageing-related cost pressures. This entails measures to improve the labour force participation of older workers and extend working lives, including by increasing the contribution period required for a full pension and stronger incentives to remain in the work force after the statutory retirement age. Such efforts should be implemented alongside structural reforms to raise potential growth. This includes a growth-friendly tax reform to lower the labour tax burden, financed by higher consumption, environmental and recurrent immovable property taxation. In addition, tax and benefit system reforms should aim to remove disincentives for second earners and single parents, often women, to move from part-time to full-time employment.