7

Construction and private consumption are a drag on growth throughout the forecast period. Slovenia has been underperforming the euro area in terms of real GDP since 2009. The main drag on growth has come from the ongoing sharp contraction in investment, with construction output declining by a quarter in 2011 alone. Private consumption also declined in real terms in 2011. Net exports made a large positive contribution to real GDP growth in 2011; while the deterioration in the external environment led to lower export volume growth than in 2010, Slovenia managed to increase its export market share. Below euro-area average growth is expected to continue throughout the forecast horizon. After a fall of 0.2% in 2011, real GDP is forecast to contract by 1.4% in 2012 before rebounding by 0.7% in 2013. Given the lack of new large infrastructure projects and a large stock of unsold new housing, construction is forecast to decline again in 2012 and more modestly in 2013. Equipment investment is projected to continue to expand over the forecast period but at a subdued pace in 2012. The investment outlook is affected by tight financing conditions for the corporate sector which is one of the most indebted in the euro area and the ongoing deleveraging process in the banking sector. Further job losses and negative real wage growth (driven mainly by developments in the public sector) are projected to entail further drops in real private consumption in 2012 and to a lesser extent, in 2013. Export growth is forecast to moderate significantly in 2012 given the outlook for further weakening of the euro-area. However, the contribution to growth from net exports is forecast to remain strongly positive, as in 2011, given the weakness of import growth. In 2013, the projected recovery in investment and exports will boost import growth and thus reduce the positive contribution to growth from net exports.

Employment continues to shrink while inflation remains below the euro-area average

Reflecting more muted activity, average HICP inflation in 2011 was lower than the euro-area average (2.1% versus 2.7%). It is projected to marginally increase in 2012, to 2.2%, as higher services inflation is forecast to be broadly offset by lower food inflation and to fall to 1.7% in 2013, essentially reflecting a moderation in energy inflation. In both years, inflation will remain below the euro-area average. Employment growth has been negative since 2009 and this is expected to continue throughout the forecast period. Unemployment doubled to 8.7% in the last quarter of 2011 relative to the trough in mid 2008. Further job losses are expected in construction, where employment has yet to fully adapt to the lower output and in labour intensive industries, which are losing competitiveness after the recent minimum wage increase. After a deceleration in 2011, average wage growth is forecast to moderate further in 2012, due to cuts in public sector wages, before picking up slightly in 2013. Risks to the real GDP growth forecast are related to intensification of negative feedback loops between deleveraging banks and the credit-constrained real economy, which could bring further bankruptcies and a more severe contraction in investment. A sharp fall in house prices, which is possible given the absence of a significant adjustment to date, would have wide ranging effects that are difficult to assess in advance. On the positive side, private consumption could be more resilient if the positive effect on confidence from the roll-out of the fiscal consolidation strategy is stronger than currently anticipated.

Government deficit ratio is forecast to decline, while debt will reach 58% of GDP by 2013

In 2011, the general government deficit was 6.4% of GDP. Without deficit-increasing one-offs from capital support operations, the deficit would have been 5.4% of GDP. The outturn is 0.7 pp. of GDP worse than the forecast estimate in autumn 2011, mainly reflecting weaker direct and indirect taxes, with a partial offset coming from lower net capital expenditure. In 2012, the deficit is forecast to decline to 4.3% of GDP. On the expenditure side, the draft budget for 2012 implements broad-based restraint on employee compensation and social transfers (including a freeze on indexation arrangements) as well as on intermediate consumption. Also, net capital expenditure has been cut compared to 2011. On the revenue side, the positive impact of higher excise duties on tobacco and alcohol is more than offset by direct tax relief (a cut in the corporate income tax rate and more generous investment allowances). Interest expenditure is forecast to increase strongly due to rising debt and the high interest rate spreads on long-term government bonds vis-à-vis Germany. The deficit forecast for 2012 is lower than the 5.3% projected in the autumn forecast mainly because the draft 2012 budget numbers have now been included. The difference to the deficit target of 3.5% of GDP mainly reflects more cautious revenue projections in conjunction with a more negative macroeconomic scenario. In 2013, the deficit is projected to decline further, to 3.8% of GDP. This reflects the incorporation of the draft act on balancing public finances, which extends several consolidation measures until after 2012 and the fact that some measures in the 2012 budget will have their full impact only in 2013. In structural terms, the deficit is projected to improve by around 1.75% and 0.25% of GDP in 2012 and 2013 respectively. Gross government debt stood at 47.5% of GDP in 2011. As a result of persistant primary deficits, rising interest rates and low GDP growth, the debt ratio is projected to grow over the forecast horizon to some 58% of GDP in 2013.The deficit and debt projections are subject to upside risk from possible further capital support operations, including for the largest (majority state-owned) banking group and calls for guarantees, while the draft budget and act on balancing public finances were, at the cut-off date, not yet approved by parliament and subject to negotiation.

Forecast for Slovenia

	2010	2011	2012	2013
GDP growth (%, yoy)	1,4	-0,2	-1,4	0,7
Inflation (%, yoy)	2,1	2,1	2,2	1,7
Unemployment (%)	7,3	8,2	9,1	9,4
Public budget balance (% of GDP)	-6,0	-6,4	-4,3	-3,8
Current account balance (% of GDP)	-0,8	-1,1	-0,4	0,7