OECD Economic Outlook, Volume 2019 Issue 2

Slovenia

Economic growth is projected to remain at around 3% until 2021. Private consumption will continue to be the main driver of growth, sustained by higher wages and solid employment gains. Uncertainty about the external environment will slow the pace of new business investment. Improvements in export performance will slow with rising labour unit costs. The import content of exports is rising, as foreign demand for goods with higher domestic value added weakens. Domestic demand is increasingly satisfied through imports, owing to tightening capacity constraints.

Fiscal policy will remain supportive of growth in the coming two years, driven by higher public sector wages and social transfers. As favourable borrowing conditions persist, growing domestic inflationary pressures call for a moderation in the fiscal stimulus. Measures to restrict pathways to early retirement would mobilise older workers, while accelerating privatisations and decentralising wage bargaining, would contribute to improve labour allocation, and alleviate labour shortages and wage pressures.

Domestic inflationary pressures are building up

Growth has moderated despite strong private consumption. Weaker foreign demand for components from the car, electrical machinery and metal products industries has been reflected in lower export growth. Growing uncertainty about future export orders contributed to lower growth in business investment. At the same time, domestic demand is increasingly satisfied through imports as capacity constraints tighten. The structure of exports is also changing towards manufactured goods with higher import content.

Sectoral wages and wages and inflation: Slovenia

1. Hourly earnings. Year on year percentage change, three-month moving average.

2. Core inflation excludes energy and food.

Source: OECD Main Economic Indicators database.

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Slovenia: Demand, output and prices

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Employment creation remains strong, mostly benefiting foreign workers, and the unemployment rate has fallen to its lowest level in a decade. Wages have accelerated, particularly in the public sector, reflecting recent wage agreements with trade unions, promotions for civil servants and a higher minimum wage. Headline inflation has risen to almost 2%, mostly driven by higher services prices. Wage pressures are feeding into higher unit labour costs and deteriorating cost competitiveness.

Reducing the fiscal stimulus is required to prevent overheating

Fiscal policy continues to be supportive, with higher public wages, social transfers and pension outlays. Higher social spending helps to preserve an equal society. However, a moderation of the stimulus is needed to contain wage and other cost pressures and to improve fiscal sustainability. The quality of bank assets continues to improve and the banking system appears to be resilient. Favourable bank lending conditions are set to continue and the volume of consumer loans has increased significantly despite tighter macroprudential measures.

Closing pathways to early retirement and better-targeted activation policies to mobilise the older, long‑term and low‑skilled unemployed, and shifting taxation away from labour to remove disincentives to work, would bolster labour supply, prolong the recovery and help to address labour market and fiscal challenges associated with population ageing. A more decentralised wage bargaining system would improve labour allocation.

Downside risks stem from prolonged tensions in international trade

Economic growth is projected to remain broadly stable in 2020‑21. A deterioration in cost competitiveness, owing to higher labour costs and weak productivity gains, will hold back export growth. Investment will continue to slow somewhat, despite higher construction activity, as spending on machinery and equipment weakens. A slow recovery of exports and business investment is expected towards the end of 2021 as international trade expands more rapidly. The main upside risk stems from a faster recovery of business sentiment and business investment growth. On the downside, prolonged tensions in the international environment could lead to lower‑than‑anticipated export market growth. Stronger wage growth, and even lower productivity gains, would also hamper the recovery of exports.