In its autumn forecast, IMAD says that the bigger-than-expected contraction is a result of domestic factors and weak export growth.

IMAD director Boštjan Vasle said that the contraction will persist in 2013, when the economy is to shrink by a further 1.4%. Modest growth may return in 2014.

Vasle explained that the downgraded growth projections for this year were based on the GDP data for the first half of the year, which showed a contraction of 1.5%.

The deterioration of the economic situation in Slovenia and the ongoing financial troubles of the eurozone were the biggest risk factors at the moment.

He warned that a further deterioration in the global economy or a failure to implement consolidation of public finances in Slovenia would mean the contraction could be even bigger.

While the downgraded forecast was labelled as realistic by Finance Minister Janez Šušteršič, one of two public sector trade unions has criticised it as a government negotiating tactic.

IMAD is laying the groundwork for the government's negotiations with social partners on reforms, Janez Posedi of the Pergam confederation of trade unions said. Posedi said the goal of the government was to present the worst possible picture of the economic situation.

He warned that such tactics could backfire as the forecasts could become a self-fulfilling prophecy once foreign partners are scared off.

Šušteršič disagrees with this assessment, saying that the updated forecasts take into account the developments in the global economy.

"Of course we think that if all the measures we are planning will be implemented, we will get results and next year we may see an upgrade in the projection," the minister said.

Slovenia's biggest trade union federation meanwhile argues that government measures are to blame for the downgraded forecast.

"Curbing social rights is a path to reducing the purchasing power of the population...which is in turn a path to a new drop in GDP," Andrej Zorko of the ZSSS told the press.

Zorko said that countries who took a different path by increasing the purchasing power of the population and pushing ahead with public investments were seeing better economic results.

While the Chamber of Commerce and Industry (GZS) agrees that austerity has further dampened the economic outlook, they say efforts must be made to boost business. Alenka Avberšek said that purchasing power would not pick up otherwise.

Jože Smole of the Employers' Association of Slovenia meanwhile said Slovenia had no option but to implement reforms if it wanted to restart its economy.

Šušteršič announced that the government had considered the revised forecasts in drawing up the budget for next year, meaning that additional corrections in the document would not be needed.

In its revised forecasts, IMAD says that exports, a key engine of growth, which had grown by 7% last year, will stall this year.

While government spending will drop again this year, private consumption is expected to register its first drop since the crisis began.

The drop this year is forecast at 3%, while consumer spending is expected to fall by 3.6% next year.

Moreover, investment spending is expected to shrink by 9% this year. But Vasle says that gross capital formations should show growth of 1.3% next year as drawing of EU funds increases.

This is a consequence of the deterioration on the labour market and more caution on the part of consumers who are putting off purchases of durable goods, Vasle said.

Exports are expected to grow by 1.9% next year, although that will depend to a large degree on the situation in the global economy.

The continuation of the crisis is to push up unemployment, with IMAD expecting the jobless figure to stand at an average of 120,000 next year, 10,000 more than this year.

While inflation is to stand at 3.3% this year, mostly on account of higher energy prices, IMAD is not concerned with price growth for next year.