OECD Economic Outlook, Volume 2018 Issue 1

Slovenia

The economy is projected to continue its strong expansion in 2018, growing at 5% in 2018 and nearly 4% in 2019. Private consumption will be boosted by strong real income growth from the buoyant labour market. Favourable financial conditions and EU structural funds will underpin business and public infrastructure investment. Exports will decelerate as higher wages undermine external competitiveness. Imports will be bolstered by higher domestic demand and tighter capacity constraints.

The fiscal stance is projected to remain expansionary, even though rapid growth will secure a higher budget surplus. Nonetheless, a still higher surplus is needed to contain inflationary pressures as monetary conditions will remain highly accommodative. In addition, greater privatisation efforts would boost jobs and growth.

Growth is broadly based

Robust private consumption growth is being boosted by real labour income gains and a decade‑high level of consumer confidence. The expansion of government consumption is continuing, reflecting the relaxation of previous austerity measures. Investment remains strong, driven by the need for expanding production capacity and EU structural funds, all supported by favourable financial conditions and still optimistic business sentiment. Exports are benefiting from stronger growth in trading partner economies and market share gains from past improvements in competitiveness.

Slovenia

1. Percentage of manufacturing firms pointing to labour shortages as a factor limiting production.

Source: Statistical Office of the Republic of Slovenia; Eurostat, industry database; OECD, Main Economic Indicators database; and OECD Economic Outlook 103 database.

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A strong employment expansion has reduced unemployment to its lowest level in a decade and increased labour shortages, leading firms to progressively recruit from abroad. So far, wage growth has remained moderate. Consumer price inflation has started to increase on the back of higher food and energy prices, although prices of durable goods are declining. At the same time, core inflation has remained stable at around 1% per year.

Slovenia. Demand, output and prices

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Fiscal policy should be more forward-looking

Fiscal policy is highly expansionary, implying little progress in securing fiscal sustainability. Public investment will continue to benefit from the disbursement of EU structural funds. With the expected continuation of the accommodative euro‑area monetary policy, macroeconomic policies are too stimulatory in the present conjuncture and fail to address future ageing‑related fiscal challenges.

Continued strong growth depends on structural reforms, including more intense privatisation efforts to free up available resources and improve their allocation. This should be supported by equipping the competition authority with more resources and expertise and the implementation of simplified judicial procedures in competition cases. Moreover, boosting the low activity rate of older workers through additional pension reform would expand the labour supply, especially if combined with improved incentives for life‑long learning. These measures would also help deepen the inclusiveness of the labour market.

Growth will moderate under tightening capacity constraints

Economic growth is projected to remain strong in 2018 before moderating in 2019 as demand is progressively satisfied by higher imports due to the increasing capacity pressures in the domestic economy. Solid real income gains on the back of expanding employment and faster wage growth will continue to support private consumption and housing investment. Business investment will be bolstered by the need to augment production capacity and maintain competitiveness through higher productivity. Exports will be buoyed by faster trading partner growth, although market share gains will diminish as cost pressures and capacity constraints build progressively. The strong labour market will push inflation to above 3% during 2019. Upside risks include faster export growth if the recovery in export markets is stronger than projected or if more intense privatisation releases resources to more dynamic exporting firms. On the other hand, if fiscal policy fails to counter labour market overheating and address fiscal sustainability, investor confidence could deteriorate and wage growth accelerate, harming external competitiveness, potentially requiring significantly tighter policies later.