Brussels - The European Commission has upgraded Slovenia's GDP growth forecast for this year by 0.2 of a percentage point to 4.9%, while downgrading it to 5.1% for 2022, by 0.1 of a point from its previous, winter outlook. Recovery is expected to be driven by domestic demand and by investment, which will fuel demand for imports.

Slovenia's economy contracted by 5.5% in 2020, but should gradually recover in 2021 and 2022, the Commission said as it released its spring forecast for EU members on Wednesday.

"After a strong recovery in the third quarter, the economy contracted again in the fourth quarter when measures to control the pandemic that restricted economic activity were reintroduced."

Private consumption meanwhile fell by almost 10% and investment by over 4%, and since imports fell faster than exports, the growth contribution from net exports was positive.

The Commission adds, however, that last year's contraction was relatively contained as industrial production and exports remained robust.

The recovery is expected to gather pace in the second and third quarters of 2021, chiefly due to domestic demand once many pandemic-related restrictions are lifted.

Investment is forecast to grow strongly in both the public and private sectors, to be driven by a strong demand for exports and an impact of EU recovery funds.

Although net exports are still forecast to contribute significantly to growth in 2021, their contribution will gradually decrease next year.

The Commission says that thanks to the government measures designed to preserve jobs, the Slovenian labour market is returning to the pre-crisis situation.

In 2021, employment is expected to recoup the losses incurred in 2020, although the recovery in the services sector is expected to be slower.

The unemployment rate is projected to remain at 5% in 2021 before falling to 4.8% in 2022, while wages are to grow more slowly than before the crisis.

As for inflation, consumer prices fell by 0.3% in 2020 on the back of lower energy prices and weaker demand, but inflation is to rise to 0.8% in 2021 and to 1.7% in 2022.

The Commission also says that the country's public finances are expected to remain significantly in deficit.

In 2021, the general government deficit is to remain high at around 8.5% of GDP, mainly due to measures mitigating the pandemic's impact and to a rise in public investment, but should drop to 4.7% in 2022.

The debt-to-GDP ratio is also expected to remain at a high 79% in 2021, down almost 2 points from 2020, and is projected to further drop to 76.7% in 2022.

The Commission has also upgraded its forecasts for the eurozone and the entire EU for 2021 and 2022, as it expects that all EU economies will return to pre-crisis levels by the end of 2022.