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.
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.
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.
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.