The Organisation of Economic Security and Development (OECD) has significantly upgraded the growth forecast for Slovenia. It predicts that the economy will expand by 3.8% this year, up from its earlier forecast of 2.4%.
Next year the pace of growth is projected to slow to 3.1%, which is still 0.8 percentage points faster than forecast in autumn.
Growth is projected to remain broad-based, with domestic demand the main driver of growth. Private consumption, especially of durables, is accelerating, as households gain confidence due to wage gains and a robust labour market.
Government consumption is also increasing, in part due to the relaxation of austerity measures such as public sector wage freezes, says the report released on Wednesday.
The OECD projects private consumption to grow by 3.7% this year and next, with government consumption rising by declining from 1.9% this year to 1.4% in 2018.
Investment is projected to accelerate as more EU structural funds are drawn, with the growth of gross fixed capital formation, which contracted strongly last year, expected to hit 6.8% this year before slowing down to 5.1% in 2018.
Exports are projected to remain robust as well supported by strong eurozone growth, with export growth projected at 5.5% this year and slightly more in 2018.
More broadly, the growth will close the fiscal deficit and ensure continued reduction of public debt.
Despite the upbeat forecast, the OECD also issues some warnings.
For example, it notes that while unemployment continues to fall, the ageing of the labour force has led to signs of shortages in some occupations. As a result, foreign workers accounted for a quarter of new hires in 2016, which has helped moderate wage growth.
Due to the tight labour market inflationary pressure will begin to emerge as well, which could undermine exports.
The organisation therefore calls on the authorities to “better target active labour market policies and close the remaining bridges to early retirement” in order to damp potential inflationary pressures.
Alternatively, Slovenia could expedite a planned tightening of fiscal policy if inflation accelerates./IBNA
Source: The Slovenia Times