OECD Economic Outlook, Volume 2023 Issue 1

Slovenia

GDP growth is projected to slow to 1.5% in 2023, reflecting weak domestic and external demand. The labour market is expected to remain tight, fuelling stronger wage growth and contributing to inflationary pressures. Growth will strengthen to 2.6% in 2024 as inflationary pressures gradually recede.

Fiscal policy will remain expansionary in 2023, before tightening in 2024. This reflects government measures to mitigate the effects of high energy prices on households, as well as higher public investment and public sector wages. Fiscal support should be financed by spending cuts as the current expansionary fiscal stance risks intensifying inflationary pressures. Structural reforms are needed to safeguard fiscal sustainability and raise potential growth, including measures to improve the labour force participation of older workers and extend working lives, as well as a lower labour tax burden, financed by higher property and environmental taxation.

Economic activity remains resilient

Economic activity expanded more than expected in the last quarter of 2022, driven by private consumption and government spending. The expansion continued in the first quarter of 2023, with GDP up by 0.6% quarter-on-quarter. The labour market remains tight with an unemployment rate of 3.2% in March. This is reflected in strong wage growth. In the fourth quarter of 2022, labour costs per hour worked grew by 11.9% year-on-year. Minimum wages rose by 12% in January 2023, while negotiated public sector wages increased by 8.5% between October 2022 and April 2023. Wage pressures have contributed to persistently high core inflation of 7.6% in April. Headline inflation peaked at 11.7% in July and slowly declined to 9.2% in April, reflecting falling energy prices.

Slovenia: Labour market and inflation indicators

1. The job vacancy rate measures the proportion of total posts that are vacant, expressed as the ratio of the number of job vacancies to the number of occupied posts plus the number of job vacancies.

2. Core inflation refers to the overall index excluding food, energy, alcohol and tobacco.

Source: Statistical Office of Slovenia; and Eurostat.

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Slovenia: Demand, output and prices

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Gas rationing was avoided due to consumption savings, a diversification of gas suppliers and a milder-than-usual winter. Gas consumption from August 2022 to March 2023 was almost 14% lower than the comparable average consumption over the past five years. Gas imports from Russia were replaced by higher imports from Algeria and Norway, among others. Euro area monetary policy tightening has resulted in tighter financial conditions. Year-on-year growth in loans moderated to 3.6% in March.

Fiscal policy adds to inflationary pressures

The government announced spending of 1.6% of GDP for 2023 to support households and businesses during the energy crisis. This includes direct subsidies to households and businesses and temporary tax cuts. The government also capped the price of electricity and gas in September 2022 until the end of 2023 for households and small businesses. This temporary measure is assumed to be phased out by the end of 2023. In addition, structural measures include an increase in spending on long-term care by 0.4% of GDP in 2024. These measures are expected to increase the budget deficit to 4.1% of GDP in 2023, before the fiscal stance is tightened in 2024 by over 1% of GDP. The expansionary fiscal stance in 2023 adds to demand and inflationary pressures.

Growth is set to slow

Growth is projected to slow to 1.5% in 2023, reflecting weaker domestic and external demand. High inflation will continue to weigh on private consumption. Weaker demand, higher interest rates and tighter financial conditions will slow investment growth, although the inflow of EU funds should moderate the slowdown to some extent. The labour market will remain tight, with historically low unemployment contributing to stronger wage growth. Domestic price pressures will keep headline inflation elevated, despite the fall in energy prices. Growth will pick up in 2024 as external demand recovers and headline inflation gradually recedes. Downside risks depend on the impact of Russia’s war of aggression against Ukraine on energy and food prices, as well as the effects of tighter financial conditions on investment. Stronger-than-expected wage growth could keep inflationary pressures elevated for longer. On the upside, stronger immigration could help reduce labour market shortages and wage pressures.

Reducing demand pressures requires faster fiscal consolidation

Faster fiscal consolidation is needed to reduce demand pressures. This entails a rapid phase-out of energy price caps. Spending on long-term care should be financed by cuts to other recurrent spending. Continued efforts to diversify gas supply, including LNG capacity in coordination with the European Union, will help improve energy security. 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 environmental and property taxation. This should be complemented by measures to improve the labour force participation of older workers and extend working lives, including by raising the minimum years of contributions required to retire and stronger incentives to remain in the work force after the statutory retirement age. Targeted information campaigns to attract more girls and women to ICT studies could support digitalisation and help address skill shortages.