The downgrade of Slovenia's economic outlook for this year is a consequences of the austerity in the public sector and the drive at companies and banks to reduce debt, the Organisation for Economic Cooperation and Development said in its report.

The organisation points out that the Slovenian economy slipped into recession in the second half of last year.

The government's efforts aimed at bringing down the budget deficit to below 3% of GDP by next year will further hurt economic activity, which is why a return to growth will require additional structural reforms, it said.

It therefore projects that Slovenia will not return to growth in 2013, when its economy is expected to shrink by a further 0.4% of GDP.

The outlook for the Slovenian economy is weaker than that for the eurozone as a whole, for which the OECD projects a contraction of 0.1% for this year and growth of 0.9% for next year.

The eurozone is expected to begin returning to growth during the course of this year, while the recovery in Slovenia is not expected for another year.

The OECD says that reforms in Slovenia must be directed at increasing stability in the banking system, boosting labour market flexibility and overhauling the pension system.

It recommends reforms of the labour market for the whole eurozone, while also urging it to overhaul its tax code in order to make it more competitive.

The OECD's forecast says that Slovenian unemployment rate is unlikely to stabilise before 2013. It projects the jobless rate to stand at 8.8% this year and rise to 9.2% next year.

Inflation in Slovenia is expected to remain in check due to weak domestic demand.

The country's structural deficit will stand at 3.9% of GDP this year, before dropping to 3% of GDP next year, while public debt will stand at 51.5% of GDP this year and rise to 54.4% of GDP next year.

The OECD's growth forecast is similar to that issued on Friday by the European Bank for Reconstruction and Development (EBRD), which projected that Slovenia's economy would shrink by 2% this year and by 1.1% next year.

The EBRD pointed to the credit crunch and drop in the competitiveness of the economy as the key reasons for the recession.

The latest forecast of the International Monetary Fund (IMF) is more optimistic, anticipating that Slovenia's economy will shrink by 1% of GDP this year, but grow by 1.4% of GDP next year.

A similar outlook was issued by the European Commission earlier this month, which forecast a contraction of 1.4% for this year and growth 0.7% of GDP for 2013.

Domestic institutions are also more optimistic than the OECD and EBRD, with the government's IMAD think-tank forecasting a contraction of 0.9% for this year and growth of 1.1% for next year.

Central bank Banka Slovenije expects the economy to shrink by 1.2% this year and to grow by 0.6% next year.

In a reaction to the OECD's report, IMAD said that the forecast was prepared keeping the latest effects of fiscal consolidation in mind.

In addition, the think-tank asserted that "IMAD and the OECD both highlight that the weaker outlook...is related to the instability on financial markets".

"The difference in the forecasts for the contraction stems from different expectations related to exports and imports, with the OECD expecting more imports and a small contribution of trade to GDP," it added.