C-bank substantially upgrades GDP growth forecast for 2022

Ljubljana, 15 June - Banka Slovenije has upgraded its economic growth forecast for Slovenia by 1.8 percentage points from its December outlook to 5.8% for this year as a result of a carry-over from last year. It downgraded the projection for 2023 by 0.9 points to 2.4%. Inflation is projected to run at 9% this year before easing to 4.5% and 2.3% over the next two years.

Banka Slovenije, Slovenia's central bank.
Photo: Daniel Novakovič/STA
File photo

"Economic growth is moderating, but annual growth for this year remains high and is largely due to the carry-over effect, which is the result of favourable developments towards the end of 2021," Robert Zorko, deputy head of the central bank's analysis and research centre, told reporters on Wednesday. The growth rate would thus run above the 2.8% projected for the euro area.

Deputy Governor Tina Žumer said growth was driven mainly by consumption, investment and exports. However, the impact of the war in Ukraine has begun to reflect in lower current growth and more moderate growth next year. The central bank expects GDP growth to slow to 2.4% in 2023 and pick up slightly to 2.5% in 2024, but it will stay above the 2.1% forecast for the euro area.

Inflation is forecast to be above the rate projected for the euro area, which, Zorko said, is due to stronger domestic demand and favourable labour market conditions. Driven mainly by higher prices of services and food, it will average 9% this year, before dropping to 4.5% and 2.3% in 2024.

In the euro area inflation is expected to run at 6.8% this year before slowing to 3.5% in 2023 and 2.1% in 2024.

Inflation is becoming increasingly broad-based, Zorko and Žumer warned. According to Zorko, 70% of all goods and services in the consumer basket that is used to calculate inflation have exceeded 3% price growth at the annual level.

The impact of rising energy and food prices is expected to diminish over the next two years, while the impact is to increase from rising prices of services, which are more affected by wage growth expectations both in response to inflation adjustment and staff shortages.

The baseline forecast of Slovenia's and other central banks of the euro system is based on the assumptions that the intense military conflict in Ukraine will subside by the end of the year and the energy, commodities and food markets will stabilise in 2023. It does not foresee any further tightening of the West's sanctions on Russia.

However, there is a high degree of uncertainty, so Banka Slovenije has also drawn up a downside scenario in case of a protracted war in Ukraine, further tightening of the sanctions and a complete embargo on oil and gas, with an even stronger rise in prices on commodity and energy markets as growing uncertainty would also reduce external and domestic demand.

In this severely negative scenario, Slovenia's growth would still be at 4.3% this year, but would be followed by a 0.4% contraction next year. Growth would then return to 3.6% in 2024. Inflation, meanwhile, would accelerate further to 9.8% this year, remain at a high 6.6% next year before falling to 2.5% in 2024.

© STA, 2022