Unemployment is unlikely to level off until the end of 2013 and the unemployment rate is forecast at 9.7% in 2013 and 9.8% in 2014, according to the OECD Economic Outlook released on Tuesday.

On the other hand, the large degree of economic slack should keep inflationary pressures contained at 2.3% in 2013 and 1.8% in 2014.

The outlook is broadly in line with other recent international forecasts, as the European Commission projected a contraction of 2.3% this year and 1.6% in 2013, whereas the European Bank for Reconstruction and Development expects Slovenia's GDP to drop by 2.5% this year and by another 2% in 2013.

The OECD report says that the government has embarked on an "ambitious fiscal consolidation". It should, however, "stand ready to let automatic stabilisers operate if growth turns out lower than expected."

To bolster longer-term fiscal sustainability, it should implement an ambitious pension reform, whereas a "transparent and durable resolution of bad assets in the banking sector" is urgently needed to ensure the stability of the financial system and revive crediting.

"The sizable deterioration in the quality of Slovenian banks' asset portfolios is a major concern. It is undermining credit growth and becoming a major obstacle to economic expansion," the report says.

Commenting on the government's consolidation measures, including new taxes, the lowering of the public sector wage bill and benefit cuts, the report says the measures would "further weigh on aggregate demand".

Overall, the OECD says that the outlook is "dominated by downside risks", as the threat of a referendum on key policy measures may undermine market confidence, and rejection of key measures could prolong the recession.

"The swift adoption of structural reforms and resolution of banking sector problems, on the other hand, would improve growth prospects."