Slovenia projection note OECD Economic Outlook November 2023

136 

Slovenia GDP growth is projected to slow to 1.4% in 2023, reflecting weaker domestic and external demand, but will pick up to 1.8% in 2024 and 2.7% in 2025, as disinflation continues to support real incomes and global economic conditions improve. EU funds and the government’s flood recovery measures will sustain investment. The tight labour market will fuel stronger wage growth, limiting the pace of disinflation.

Fiscal policy will remain expansionary in 2023, reflecting government measures to mitigate high energy prices and recover from the devastating floods of the summer, before tightening in 2024 and 2025. Fiscal consolidation should be undertaken through more efficient prioritisation of spending, as the current expansionary fiscal stance risks exacerbating inflationary pressures. Structural reforms are needed to preserve fiscal sustainability and raise potential growth, including measures to improve the labour force participation of older workers and reduce labour shortages, and to lower the labour tax burden.

Economic activity is moderating as foreign demand weakens Economic activity slowed in the third quarter of 2023, with GDP declining by 0.2% quarter-on-quarter due to subdued private consumption and lower exports. The labour market remains tight with the unemployment rate at 3.6% in September. Minimum wages increased (in January 2023) as well as public sector wages (as a result of negotiated wage agreements in October 2022). Overall, this is reflected in strong wage growth, with labour costs and earnings per hour worked both increasing by 14.6% year-on-year in the second quarter. Wage pressures have contributed to high core inflation of 7.0% in the third quarter of 2023 (year-on-year), with headline inflation at 6.3%.

Slovenia

Source: OECD Main Economic Indicators database; Statistics Slovenia; OECD Economic Outlook 114 database; and OECD calculations.

StatLink 2 https://stat.link/7ju24x

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

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Slovenia: Demand, output and prices 2020

Slovenia GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding¹ Total domestic demand Exports of goods and services Imports of goods and services Net exports¹ Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation² Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition³ (% of GDP) Current account balance (% of GDP)

2021

2022

2023

2024

2025

Percentage changes, volume (2010 prices)

Current prices EUR billion

47.0 23.7 9.7 8.9 42.3 0.5 42.8 36.6 32.4 4.2

8.2 10.3 6.1 12.6 9.8 0.4 10.1 14.5 17.8 -1.0

2.5 3.6 -0.5 3.5 2.7 1.0 3.7 7.2 9.0 -1.0

1.4 0.3 1.9 8.6 2.5 -4.7 -2.7 -2.5 -6.6 3.7

1.8 1.3 2.1 3.7 2.0 -0.3 1.7 1.6 1.1 0.5

2.7 2.6 1.4 3.8 2.6 0.0 2.7 3.3 3.4 0.2

_ _ _ _ _ _ _ _ _

2.7 2.0 0.9 4.8 10.2 -4.6 95.1 74.4 3.3

6.5 9.3 5.9 4.0 6.4 -3.0 74.4 72.3 -1.0

9.1 7.5 7.0 3.7 7.5 -4.5 76.8 71.4 4.5

4.9 4.8 5.3 3.6 8.0 -3.8 79.1 70.1 3.1

3.4 3.2 3.3 3.6 7.5 -2.9 80.5 68.6 3.8

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

3. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.

Source: OECD Economic Outlook 114 database.

StatLink 2 https://stat.link/eothk2

Slower global growth and deteriorating cost competitiveness (owing to increased energy prices and labour costs) have weakened exports: in the third quarter of 2023, real exports declined by 9.2% year-on-year.

Gas import dependency on Russia has declined and gas consumption has been lowered this year. Euro area monetary policy tightening has resulted in tighter financial conditions. Loans to the non-banking sector decreased by 0.6% in August year-on-year, from around 5% average growth before the pandemic.

Supportive fiscal policy adds to demand and inflationary pressures The government extended the cap on electricity and gas prices for households and small business until the end of 2023 and will maintain it for all households in 2024, albeit at a lower level, reflecting lower market prices. The cap for electricity will cover up to 90% of 2023 consumption throughout next year, but the gas cap will end in April 2024 with the heating season. The government announced flood recovery support of 1.1% of GDP in 2023 and further measures of 1.9% in 2024 and 0.9% in 2025. Structural measures include an increase in spending on long-term care by less than 0.1% of GDP in 2024 and 0.5% in 2025. These measures are expected to contribute to a budget deficit of 4.5% of GDP in 2023, before the fiscal stance is tightened in both 2024 and 2025, as flood recovery and energy support measures are gradually withdrawn. The expansionary fiscal stance in 2023 has added to demand and inflationary pressures, already heightened by strong wage growth.

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

138 

Economic growth is set to moderate Growth is projected to slow to 1.4% in 2023, reflecting weaker domestic and external demand, before picking up to 1.8% in 2024 and 2.7% in 2025. Elevated inflation is holding back private consumption, but investment is being supported by the inflow of EU funds and the flood recovery measures. The labour market will remain tight, contributing to stronger nominal wage growth but real income growth will be subdued by elevated headline inflation. Growth will improve as foreign demand recovers and headline inflation gradually abates. Public debt is projected to decline to 71.4% of GDP in 2023 and further in the next two years, mainly reflecting strong nominal GDP growth and a gradual reduction in state budget liquidity reserves. A key downside risk is that disruption in energy markets from Russia’s war of aggression against Ukraine and the conflict in Israel would restrict economic activity. Also, persistent wage growth and higher energy prices could fuel inflationary pressures. On the upside, recent measures to facilitate the recruitment of foreign labour could help alleviate labour market shortages and wage pressures, while stronger growth among trading partners may revive exports.

Fiscal consolidation and structural reforms are needed for more sustainable growth Faster fiscal consolidation is needed to reduce demand and contain inflationary pressures. Fiscal space should be rebuilt by better targeting support for high energy prices, if needed, at the most vulnerable households and through more efficient public spending. Ageing-related public expenditure is projected to increase by 3.7 percentage points of potential GDP between 2024 and 2040. Continued efforts to diversify gas supply will help to improve energy security. Such efforts should be implemented alongside structural reforms to raise potential growth. A growth-friendly tax reform to lower the labour tax burden could be financed by higher environmental and property taxation. This should be complemented by measures to further improve the labour force participation of older workers, extend working lives and reduce labour shortages, such as raising the minimum years of contributions required to retire and stronger incentives to remain in the work force after the statutory retirement age. This, together with the establishment of a rule-based system of public wage increases with enough flexibility to address sector-specific recruitment problems would strengthen fiscal sustainability.

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023