The Slovenia Times

Economic Growth Expected to Ease



The economy of the European Union is expected to grow by 2.9% in 2007 and 2.7% in 2008 (2.6% and 2.5%, respectively, in the Eurozone) as a result of solid investment and stronger private consumption, according to the European Commission's spring economic forecasts. Such growth levels are an upward revision of half a percent for 2007 in both areas compared to the autumn forecast. The EU as a whole is predicted to create almost nine million new jobs over the 2006-2008 period, six million of them in the Eurozone. This will help to reduce EU unemployment to less than 7% in 2008 from 8.75% in 2005. The economic recovery will continue to improve public finances, with the general government deficit forecast to fall to around 1% in both the EU and the Eurozone - a level not seen in many years. Inflation is expected to remain contained, although the outlook is for a slight pick-up of underlying inflation over the forecast horizon, mirroring the renewed increase in oil prices and the cyclical recovery. As the European Commission has said in the Spring Forecast, Slovenia's economic growth will decrease from 5.2% in 2006 to 4.3% this year and 4% in 2008, as a result of lower investment spending. The predictions are similar to those of Institute of Macroeconomic Analysis and Development (IMAD). Last year, Slovenia recorded the highest GDP growth of this decade. With last year's 5.2% growth, it was 1.2 % higher than the year before and 0.5 % above IMAD's autumn forecast. The acceleration of GDP growth seen in 2006 primarily reflected the growth of gross fixed capital formation, which increased strongly over the year before and exceeded the autumn forecasts. According to IMAD, favourable economic developments are expected to continue this year against the background of a stable macroeconomic environment. GDP growth will ease off somewhat, but will nevertheless be higher than projected in the autumn. Given the adopted macroeconomic policy measures and the projected slowdown in the external environment, GDP growth will stabilise at a level between 4% and 4.5% after 2007. GDP growth in 2007 will also be buttressed by the effects of the changed tax legislation that entered into force on 1 January 2007. However, to achieve a more visible increase in potential growth to a level above 5% in the next few years, which was foreseen in strategic documents, the pace of change would have to be faster than in the previous years, particularly in R&D investment and innovation activities where developments have been relatively modest so far. The annual inflation rate for 2006 was 2.5%, unchanged compared with 2005. According to European Commission, the consumer price increase is projected to stabilise around its 2006 level, given the moderation of aggregate demand and the containment of unit labour cost increases at relatively low levels. Apart from oil prices, however, inflation prospects are vulnerable to the liberalization of the electricity and natural gas market for households planned for 1 July 2007. The unemployment rate of 6% in 2006 is a result of the situation in the labour market having markedly improved based on solid economic activity. The unemployment rate is expected to decrease slightly following moderate increases in employment and labour supply throughout the forecast period.


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