Slovenia

The economic outlook for Slovenia has deteriorated because of the war in Ukraine but the economy has proven more resilient than most peers among the EU member states in Central and Eastern Europe (CEE). Following a strong post-Covid-19 rebound with +8.2% real GDP growth in 2021, economic activity began to cool in H2 2022 amid elevated inflation, rising interest rates, softening external demand and declining business confidence. Full-year growth came in at +2.5% in 2022, however, a recession was avoided. We estimate growth to have come in at about +1.5% in 2023, supported by a strong increase in fixed investment and net exports. Solid tourism activity kept real exports almost stable while real imports plunged, reflecting weak domestic consumption and declining inventories. Looking ahead, growth is forecast at an annual average of +2.5% or so in 2024-2025 on the back of a mild recovery of domestic consumption and continued investment activity, supported by EU funding. External trade activity should also resume, but with import expansion matching exports, the contribution of net trade to overall growth is set to remain small.

Inflationary pressures have been milder than in peer CEE countries but will nonetheless remain on the cards in 2024- 2025. Consumer price inflation rose to a peak of 11.0% in July 2022 and hovered around the 10% mark until March 2023 before falling to 4.2% y/y in December. Owing to strengthening price pressures for recreation, the disinflation path may face some hurdles going forward. We forecast annual average inflation to moderate from 7.5% in 2023 to around 3.8% in 2024 and 3% in 2025, i.e., remaining above the ECB’s 2.0% target for some time. Potential energy price spikes and flood-related adverse effects pose some upside risks to our forecasts.

The business environment for corporates in Slovenia is strong. The World Bank’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. The Heritage Foundation’s Index of Economic Freedom survey 2023 assigns the country rank 37 out of some 180 economies (up from rank 48 in 2021), reflecting strong scores with regard to property rights, judicial effectiveness, trade freedom, investment freedom and business freedom. However, weaknesses remain with regard to the tax burden and financial freedom. Concerning environmental sustainability, Slovenia scores less favorably, owing to a low level of renewable electricity output, a moderate recycling rate and a high vulnerability to climate change. However, it does well regarding energy intensity, CO2 emissions and water stress. Overall, Slovenia ranks 84th out of 210 economies in our proprietary Environmental Sustainability Index.

Overall systemic political risk is low. Slovenia is a wellestablished democracy and has good international relations, reflected in its EU, OECD and NATO membership. Broad policy continuity can be expected after national elections. Slovenia’s sovereign creditworthiness is not at risk as all major political parties support fiscal discipline. Lastly, Eurozone membership provides for moderate transfer and convertibility risk in Slovenia.