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Autumn forecast 2021: economic outlook improved but uncertainty remains

The economic outlook has improved and we expect GDP growth of 6.1% this year. Mainly due to higher forecasts in the international environment, faster-than-expected activity growth, especially in the second quarter and the summer months, and the continued adjustment of businesses and consumers to the changed conditions, our forecast is higher than projected in the Spring Forecast (4.6%). After a sharp decline in economic activity last year (4.2%), the recovery in activities related to external trade (manufacturing and transportation), which began in the second half of last year, continues this year. Export and import trends are favourable and, on the investment side, investment in equipment and machinery in particular is increasing. With the gradual easing of containment measures, turnover in trade increased year-on-year. Accommodation and food service activities, gambling and betting activities and sports, cultural, entertainment and personal care services have also been recovering. Private consumption also increased, mainly due to growth in disposable income, but also to the gradual use of accumulated savings, which rose sharply over the past year. At the same time, the household savings rate is expected to exceed the 2019 level in the coming years. Manufacturing and construction, as well services related to these two sectors, will mostly already reach their 2019 levels of activity this year, as will investment and international trade. Other business services and private consumption, which have been hit harder by the epidemic, will mostly reach their pre-crisis levels next year, except tourism-related services that will reach that level later. As the economy is recovering, labour market conditions are improving, and the negative impact of the coronavirus crisis continues to be mitigated this year by government measures. For this year, we expect 0.8% employment growth and a 11% decline in the average number of unemployed, which will be only 2% higher than in 2019. Over the next two years, the economic recovery will continue. In 2022, GDP growth is expected to moderate to 4.7% and to 3.3% in 2023. Labour market conditions will further improve, while limitations due to labour shortage will become an even more pressing problem. Epidemiological situation remains uncertain, which is also the greatest risk to the realization of the forecast. Therefore, it will be very important to adapt the measures to mitigate the consequences of the epidemic to the epidemiological and economic situation, as well as to strengthen development content with the support of the funds from the Recovery and Resilience Plan and the multiannual financial framework. These are the key findings of the Autumn Forecast of Economic Trends presented by the Institute of Macroeconomic Analysis and Development (IMAD).

In its Autumn Forecast, which was prepared at the beginning of September, IMAD predicts a 6.1% GDP growth this year. After a sharp contraction of economic activity last year (4.2%), the recovery in activities related to external trade (manufacturing and transportation), which began in the second half of last year, continues this year. Growth of investment in machinery and equipment and imports and exports also continues. With the gradual easing of containment measures, turnover in trade increased year-on-year. Since the second quarter, the accommodation and food service activities, gambling and betting activities and sports, cultural, entertainment and personal care services have also been recovering, which is related to the recovery of private consumption. Construction activity declined in the first half of the year, mainly because of supply disruptions and high material prices. According to the available data, we estimate that growth in activities related to external trade continues over the summer, as well as, due to the continued easing of containment measures and despite the introduction of the recovered/vaccinated/tested rule, the recovery in services and private consumption, which will have a positive impact on the growth of overall economic activity. Further growth in service activities and private consumption is also driven by the redemption of last year's and this year's vouchers. In the second half of the year, we expect construction activity to recover, which will be stimulated by government investment. 

We expect overall economic activity growth to slow in the final quarter, as the spread of the virus in the colder months, in addition to the restrictions already in place (e.g. recovered/vaccinated/tested rule), will lead to more cautious (self-limiting) behaviour by the population, which will hamper growth, especially in service activities and private consumption. Growth in manufacturing, which is facing supply-side constraints, is also expected to slow down. We also expect growth in investment in equipment and machinery to slow. “Mainly due to better prospects in the international environment, faster-than-expected growth of activity, especially in the second quarter and the summer months, and the continued adjustment of businesses and consumers to the changed conditions, our forecast is somewhat higher than projected in the Spring Forecast (4.6%). For this year, we thus expect 6.1% GDP growth,” Maja Bednaš, Director of IMAD, explained. Economic activity is expected to exceed 2019 pre-crisis levels as early as this year, which will be, albeit to a lesser extent than last year, due to certain measures to mitigate the consequences of the epidemic.

 

 

The economic recovery remains differentiated across sectors. Manufacturing and construction, as well as services related to these two sectors, will mostly already reach 2019 activity levels this year. The same goes for investment and international trade. Other business services and private consumption, which have been hit harder by the epidemic, will mostly reach their pre-crisis levels next year, except tourism-related services that will reach that level later. Private consumption will be recovering, reflecting growth in disposable income, but also the gradual use of accumulated savings and thus a gradual decline in the household savings rate, which is, nevertheless, expected to remain significantly higher than in 2019. Growth in government consumption will also remain solid this year. 

Over the next two years, the recovery of the economy will continue and material supply constraints should subside. In 2022, growth is expected to slow down to 4.7%. Certain containment measures are, however, expected to be retained (particularly in 2022), which will limit a full recovery in certain service activities (especially travel). After two years of relatively strong growth, we forecast 3.3% GDP growth for 2023.

As the economy is recovering, labour market conditions are also improving. This year, the negative consequences of the coronavirus crisis continue to be mitigated by government measures and we expect the measures to be further adapted to the epidemiological and economic situation. “For 2021, we expect 0.8% employment growth and a 11% decline in the average number of unemployed, which will be only 2% higher than in 2019,” Maja Bendaš emphasised. Over the next two years, gradual recovery in the labour market is expected to continue.

This year, inflation will average 1.4%. Higher price growth at the end of the year (2.5% year-on-year) will mainly be driven by higher energy prices (also due to last year's low base), while prices of non-energy industrial goods are also starting to rise due to production constraints amid solid demand. Growth in prices of food and services will remain modest. Average inflation will rise to 2% next year, influenced by a large carryover from the second half of this year, and especially due to the rise in service prices, related to the ongoing recovery, which will continue to be an important contributor to inflation in 2023. We also expect higher non-energy commodity prices to be reflected in the final prices over a longer period of time.

 

 

The greatest risk to the realisation of the forecast remains associated with the epidemiological situation and vaccination coverage in Slovenia and its most important trading partners. Possible more stringent containment measures in the face of new waves of infections, also as a result of new and more infectious coronavirus mutations and thus further major closures of economies, pose the greatest risk to a more stable recovery. The high level of uncertainty and hampered business operations in certain service sectors would also lead to savings being maintained at high levels or used more slowly. Greater business problems could translate into a greater number of bankruptcies and insolvencies, which could lead to an increase in unemployment and consequently affect the banking and financial sectors. “Therefore, a well-planned adaptation of measures to mitigate the consequences of the epidemic to the epidemiological and economic situation remains very important. At the same time, it is increasingly important to strengthen the development content with the support of the Recovery and Resilience Plan and the multiannual financial framework”, emphasised Maja Bednaš. Higher inflation, which could occur if demand recovers faster and the current supply constraints at the global level last longer, also represents a negative risk. 

Economic growth could also be higher in the event of a faster and lasting improvement in the epidemiological situation and adequate vaccination coverage. This could lead to a greater use of excess household savings and faster growth in investment due to higher confidence. Higher global economic growth represents a positive risk, as it could have a stronger positive impact on growth in the EU. Another key factor will be the speed and efficiency of the absorption of resources from the new multi-annual financial framework and the financial package for the recovery and resilience in Slovenia and its main trading partners and their targeted use to address the main development challenges.
 

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