Slove­nia

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Af­ter two years of con­trac­tion, Slove­nia is ex­pected to see very fee­ble growth in 2014. Lend­ing to the pri­vate sec­tor will con­tinue to be a se­vere con­straint as fi­nan­cial in­sti­tu­tions delever­age. Ex­port growth should pro­vide a much-needed boost to the econ­omy. The pace of growth is ex­pected to ac­cel­er­ate over the medium term with rates of growth reach­ing 2.0% per year by 2017. Pop­u­la­tion age­ing poses a se­ri­ous prob­lem. A weak jobs market and a credit crunch un­der­mine con­sumer spend­ing. Be­fore its ac­ces­sion to the EU, Slove­nia's per capita GDP (at pur­chas­ing power par­i­ties) was about 50% of the bloc's av­er­age. But in the 25-coun­try group that in­cludes so many poorer coun­tries, the fig­ure reached 91%. At this level, Slove­nia is not el­i­gi­ble for struc­tural funds given to the EU's poor­est re­gions.

The econ­omy grew faster than eco­nomic po­ten­tial from 2005 un­til mid-2007. How­ever, the pace de­cel­er­ated in 2008 and in 2009 Slove­nia ex­pe­ri­enced one of the largest eco­nomic con­trac­tions among euro area coun­tries. A timid ex­port-driven re­cov­ery faded as ex­ter­nal de­mand slumped. In the next few years, the fis­cal deficit rose and com­pet­i­tive­ness waned.

Af­ter two years of fee­ble growth, Slove­nia slipped back into re­ces­sion in 2012 and 2013. The ef­fects of fis­cal con­sol­i­da­tion were com­pounded by a se­vere credit crunch.

Eco­nomic out­look

Af­ter two years of con­trac­tion, Slove­nia is ex­pected to see very fee­ble growth with real GDP ris­ing by 0.1% in 2014. Lend­ing to the pri­vate sec­tor will con­tinue to be a se­vere con­straint as fi­nan­cial in­sti­tu­tions delever­age. Ex­port growth should pro­vide a much­needed boost to the econ­omy.

In­fla­tion was 1.8% in 2013 and the same rate of in­crease is ex­pected in 2014. Fall­ing com­mod­ity prices, static nom­i­nal wages and de­pressed de­mand are par­tially off­set by higher taxes.

The real value of pri­vate fi­nal con­sump­tion fell by 3.5% in 2013 and an­other de­cline of 0.5% is fore­cast for 2014. A weak jobs market and a credit crunch un­der­mine con­sumer spend­ing. House­hold debt, at just 30% of GDP, is much lower than the euro area av­er­age. The cor­po­rate sec­tor, how­ever, is one of the most in­debted in the euro area.

Em­ploy­ment growth has been neg­a­tive since 2009. Un­em­ploy­ment was 10.1% in 2013 and it will be 10% in 2014. Long-term un­em­ploy­ment ac­counts for more than 50% of the to­tal. The labour market is not flex­i­ble al­though an im­prove­ment is ex­pected af­ter re­cent re­forms. A re­cent drop in labour costs should boost com­pet­i­tive­ness.

Eval­u­a­tion of market po­ten­tial

The pace of growth is ex­pected to ac­cel­er­ate over the medium term with rates of growth reach­ing 2.0% per year by 2017. Do­mes­tic de­mand should grad­u­ally strengthen. Im­prov­ing con­di­tions in world mar­kets will stim­u­late ex­ports. Bank re­struc­tur­ing could take much longer than ex­pected. The po­ten­tial rate of growth is es­ti­mated to be shrink­ing by 0.5-1.0% per year ow­ing to slow growth in pro­duc­tiv­ity and high lev­els of struc­tural un­em­ploy­ment.

More than 40% of the econ­omy re­mains in state hands, com­pared to 8.0% in Hun­gary. Nearly half of pub­lic spend­ing goes to so­cial trans­fers, with very lit­tle reach­ing those truly

in need. In the field of pri­vati­sa­tion, steel and en­ergy hold­ings could all at­tract se­ri­ous in­ter­na­tional at­ten­tion but none are likely to be sold in the near fu­ture. There is a dan­ger that pri­vate con­sump­tion will prove to be weaker than ex­pected ow­ing to the poor per­for­mance of the labour market. Fi­nally, Slove­nia has one of the fastest age­ing pop­u­la­tions in Europe.

For­eign trade

Ex­ports ac­count for a sig­nif­i­cant por­tion of GDP but their share has fallen as de­mand in Western Euro­pean mar­kets fal­tered. In 2013, ex­ports were 61.2% of GDP, up from 53.6% in 2008. Ex­ports (in dol­lars) rose by 6.8% in 2013 and gains of 5.9% are fore­cast for 2014.

Slove­nian ex­ports are con­cen­trated in rel­a­tively low value-added in­dus­tries, which leave them vul­ner­a­ble to mount­ing com­pe­ti­tion from Asian com­peti­tors.

In 2013, 75.1% of to­tal ex­ports went to the EU – mainly to Ger­many, Italy and Aus­tria. Trade with neigh­bour­ing ex-Yu­goslav coun­tries is sig­nif­i­cant, but de­creas­ing. Ex­ports of ma­chin­ery and trans­port equip­ment and ba­sic man­u­fac­tures rep­re­sented 57.7% of the to­tal in 2013.

The cur­rent ac­count sur­plus was 6.3% of GDP in 2013 and it will nar­row to 5.9% of GDP in 2014. The sur­plus is largely due to im­port com­pres­sion though mod­est im­prove­ments in com­pet­i­tive­ness are also un­der­way.

Busi­ness en­vi­ron­ment

The gov­ern­ment plays a ma­jor role in the econ­omy with gov­ern­ment spend­ing ac­count­ing for about 50% of GDP. A be­lated process of pri­vati­sa­tion was launched late in 2013. The gov­ern­ment has an­nounced plans to sell at least a dozen state-con­trolled com­pa­nies, in­clud­ing a ma­jor lender, the na­tional air­line, Ljubl­jana in­ter­na­tional air­port and Telekom Slove­nia. A small num­ber of “strate­gic” com­pa­nies will not be pri­va­tised. These ap­par­ently in­clude en­ergy in­fra­struc­ture, rail­ways and some fi­nan­cial ser­vices. The pri­vati­sa­tion of pub­licly-con­trolled banks and cor­po­ra­tions is es­pe­cially im­por­tant. Rev­enues from these sales are ex­pected to cut the pub­lic debt by around two per­cent­age points.

As part of its ef­fort to re­turn to growth, Slove­nia has al­ready im­ple­mented im­por­tant labour market and pen­sion sys­tem re­forms. A grad­ual cut in the cor­po­rate tax rate and more gen­er­ous in­vest­ment and R&D al­lowances have been made but these moves will make the gov­ern­ment's ef­forts to deal with its fis­cal prob­lems more dif­fi­cult. Ac­cord­ing to the Euro­pean Com­mis­sion, the in­for­mal econ­omy rep­re­sents 24.1% of GDP, higher than the av­er­age for Cen­tral Europe.

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