The economy proved resilient to external shocks following Russia’s war of aggression against Ukraine, but the post-pandemic recovery has slowed. Inflation has fallen but remains elevated. Improving fiscal sustainability, amid ongoing reconstruction after the devastating floods of 2023, is a key challenge.
Following a robust recovery from the pandemic, economic growth has slowed amid weaker private consumption and foreign demand. The labour market remains tight, although employment growth is weakening, notably in manufacturing. A high number of job vacancies points to widespread labour shortages, leading to strong nominal wage growth. At the same time, real wage growth outpaced labour productivity and is eroding external competitiveness, adding to the headwinds facing the export sector.
Inflation has peaked but remains higher than in the euro area (Figure 1). While energy prices have fallen, services inflation remains elevated, mainly driven by strong wage growth. Policy-makers must find a balance between protecting real incomes, limiting second-round effects on inflation and avoiding sustained losses of competitiveness. Supportive fiscal measures add to inflationary pressures and need to be phased out swiftly.