Further growth in private and government consumption will contribute more to economic growth than last year. Growth will continue to be underpinned by private sector and government investment, which will increase only slightly less than last year. Export growth will also remain strong, yet somewhat lower than last year, consistent with more moderate growth in foreign demand. The lower growth rates of investment and exports will thus be the main reasons for lower economic growth than last year (4.9%), and than in the Spring forecast of this year (5.1%). In the next two years, economic growth will slow further, due to gradually weaker growth in foreign demand and increasingly, the consequences of demographic factors, i.e. a decrease in the working age population.

Export growth is expected to be somewhat more moderate in 2018 and in the next two years, although still strong. Economic growth in Slovenia's trading partners will ease somewhat this year according to the latest forecasts by international institutions. After last year's extraordinarily high rates, Slovenian exports will see more moderate growth this year, associated with slower growth in foreign demand and the absence of one-off factors in the automotive industry, which significantly increased exports particularly in 2017, but also in 2018. Since, at the same time, the moderation of growth will also be affected by gradually higher growth in labour costs, we expect no further improvement in export competitiveness in the coming years. Amid the continuation of relatively strong growth in domestic consumption, growth in imports will ease more slowly than the growth of exports. The contribution of external trade to GDP growth will therefore be lower, yet still positive.

Investment growth will remain high in 2018-2020; private consumption will also make a significant contribution to growth. Growth is expected in all segments of investment activity, not only in construction (housing and infrastructure investments), but also in investment in machinery and equipment; amid rising demand, this will continue to be boosted by high capacity utilisation and good business performance. The growth in private consumption will strengthen this year under the impact of favourable labour market conditions and moderate optimism among consumers, then fall slightly in the next two, for the most part owing to slower growth in employment. Growth in government consumption is also expected to strengthen somewhat this year amid growth in employment in the general government sector and then ease gradually in the following years.

Employment growth will remain high this year, before moderating in the coming years, mainly under the impact of demographic changes. Employment will continue to rise across most activities, but given the increasingly limited pool of labour, its growth will gradually slow down despite slightly higher labour force participation and the hiring of foreign nationals. The number of registered unemployed will continue to fall. Amid further growth in economic activity and employment, this will also be due to demographic factors (hiring to replace the rising number of retirees, outflows from unemployment into retirement).

Wage growth will be strengthening in the 2018-2020 period, reflecting favourable economic developments and the increasingly limited supply of skilled labour. The working-age population will continue to shrink and enterprises will find it increasingly difficult to find appropriately skilled workers. All of this will put further upward pressure on wage growth. Wage growth will nevertheless remain more or less in line with productivity growth, particularly in the export sector, as companies will try to maintain competitiveness. However, cost competitiveness could deteriorate gradually, given the expected wage and productivity movements in Slovenia's trading partners. Stronger wage growth is also expected in the general government sector, notably next year with the foreseen relaxation of the remaining wage cost containment measures.

Inflation will slightly exceed 2% by 2020. Price growth, which rose somewhat last year following a period of prolonged very low growth and deflation, will be slightly higher this year (1.8%), mainly owing to strong oil price rises and a gradual strengthening of growth in the prices of services. With further growth in demand and the strengthening of cost pressures, price growth will continue to increase steadily in the next few years.

The surplus of the current account in the balance of payments will remain very high in 2018-2020 (6%-7% of GDP). The persistent high surplus relative to GDP is attributable to strong private sector savings amid the still relatively low level of investment and moderate private consumption. Slovenia will continue to have a surplus in the balance of trade in goods and services and deficits in the balance of primary and secondary incomes.

In the estimate of the position of the economy in the business cycle, some indicators point in the same direction as the output gap, which has been positive since this year, but this is not corroborated by most other indicators, which remain moderate. Indicators pointing in the same direction as the output gap include, for example, the (rapid) growth rates in the property market (in the volume of transactions and prices) and extraordinarily, in some activities historically, high values of the indicators of labour shortages and capacity utilisation. On the other hand, financial and price indicators, particularly inflation, bank lending activity and the current account surplus - where positive trends have started to strengthen only recently and should mostly continue at a moderate pace - indicate only modest rates of growth or change.

The main risks to the autumn forecast are possible changes to the conditions in the international environment than assumed in the baseline scenario, which could lead to lower economic growth. The predominantly negative risks in the international environment have strengthened notably since the spring. In the still favourable cyclical economic conditions, they are mainly associated with: i) protectionist measures and the unpredictability of economic measures in the US in general, ii) the consequences of tightening monetary policy in the US and, in the medium term, also in the euro area, iii) high valuation of assets on financial markets (especially in the US), and iv) political changes and uncertainty regarding the economic policies of some countries in the European Economic Area.
In the domestic environment, risks to the forecast are still broadly balanced in the first two years. The possibilities for higher economic growth (in the short term) are related to i) relatively high consumer and business confidence and ii) rising pressures on wage growth in the private and public sectors. Were favourable borrowing conditions and positive external developments to continue, this could lead to even higher growth in investment and private consumption and in the short term, higher economic growth. The risk that GDP growth will be lower than forecast are associated with increased uncertainty about tax policy and in the coming years, higher-than-predicted wage growth and greater uncertainty about policy measures for dealing with demographic change.

Institute of Macroeconomic Analyses and Development - IMAD