Slovenia expecting sharp decline in economic activity this year

Slovenia expecting sharp decline in economic activity this year

The Bank of Slovenia is seeing a sharp (7.6%) decline in economic activity this year in the country as a result of the coronavirus pandemic, before a recovery next year (3.1% growth). In the macroeconomic projections released on Tuesday, t iis emphasised that the realisation of this forecast will primarily depend on the success of the rollout of the vaccine. The economic contraction has been profoundly mitigated by economic policy stimulus measures, without which this year’s decline in economic activity would be a third larger. Government measures have also played a large role in maintaining stability in the labour market: thanks to these measures, the rise in unemployment is expected to be smaller than projected in previous estimates. Consumer price inflation will be negative this year, however price pressures are expected to gradually rise after the epidemiological situation improves, thus strengthening inflation.

Economic activity will decline by 7.6% this year, before growing by 3.1% in 2021. Next year’s recovery will be slightly slower than forecast in the previous projections, as a result of the new wave of outbreaks this autumn.

“Given the rapidly evolving epidemiological situation, there is great uncertainty in the economy. Banka Slovenije (Bank of Slovenia) has therefore drawn up two alternative scenarios alongside its core forecast; a milder scenario and a more severe scenario, which differ primarily in the assumption concerning the future evolution of the epidemic. While the milder scenario anticipates the autumn wave of the epidemic being successfully contained this year and the gradual lifting of measures towards the end of December, the more severe scenario envisages the bad epidemiological picture being prolonged, reflected in the extension of stringent containment measures. Under the more positive scenario, GDP would bounce back to its pre-crisis level as soon as next year, while under the worst-case scenario it would decline further next year and would only approach its pre-crisis level near the end of the projection horizon,” the Bank of Slovenia announced.

While monetary policy continues to provide for favourable financing conditions, the fiscal aid packages at national and European level are ensuring the conditions for preserving the potential of the economy, and with it the fastest possible recovery after the end of the pandemic. The Bank assesses that, in the absence of these measures, this year’s decline in economic activity in Slovenia would have been approximately a third larger. Alongside other economic policy measures, investment activity will be further strengthened over the coming years by funding from the EU Recovery Instrument after the pandemic.

Consumer prices will fall by 0.2% over the course of this year. After rising last year, core inflation excluding energy, food, alcohol and tobacco will be slowing to just 0.9% this year. This will be largely driven by the contraction in the economy and the uncertainty on the labour market, which is being reflected in a sharp decline in capacity utilisation and in reduced domestic price pressures. This year’s decline in private consumption has had a sharp impact on growth in prices of services related to tourism, arts, recreation, culture and transport. Energy prices are the largest factor in the slowdown in headline inflation, while upward pressure is mainly being applied by food price inflation, which stands at 3%. Allowing for the changing structure of household consumption, the epidemic’s negative impact on inflation would be slightly smaller. The gradual recovery in domestic and foreign demand that will ensue following an improvement in the epidemiological picture is expected to bring an increase in domestic and foreign price pressures. Inflation will reach 1.6% by 2023. /ibna