Ljubljana - In its winter economic forecast, the European Commission has downgraded Slovenia's gross domestic product (GDP) forecast for this year from 5.1% to 4.7%, while a rebound of 5.2% is expected in 2022, an upgrade from the 3.8% in its previous outlook.

The Commission has also estimated Slovenia's GDP to have contracted by 6.2% last year, which is an upgrade of 0.9 of a percentage point compared to the autumn forecast.

The winter forecast report, released on Thursday, says that the "recovery in the third quarter of last year, however, was followed by a strong resurgence in COVID-19 infections and the introduction of new restrictions in the fourth quarter."

This dampened economic sentiment and reduced private consumption significantly, but the impact was softened by extensive measures to support employment and limit insolvencies. Still, the unemployment rate increased slightly.

The European Commission expects that the economic situation in Slovenia will gradually improve as more people are vaccinated and restrictions are relaxed, leading to stronger growth in the second half of the year.

Overall, GDP is forecast to grow by 4.7% this year supported by both strong domestic demand and positive net exports. The economy is expected to grow by 5.2% in 2022, driven by the same factors as in 2021.

"GDP is expected to exceed its end-2019 level by the end of 2022," the report for Slovenia adds.

The Commission assessed that, once support measures end, the recent increase in the minimum wage could place additional strain on struggling companies in the services sector, which constitutes a downside risk to the forecast.

When it comes to inflation, it noted that the sharp decline in energy prices in March 2020 had led to deflationary pressures that were still being felt at the end of 2020 despite the partial recovery in energy prices.

Inflation is expected to remain very low in the beginning of 2021 and to increase somewhat in the second half of the year.

"Overall, prices are expected to increase by 0.8% in 2021, and in 2022 inflation is expected to reach 1.7%," the report concludes.