Eurozone EY Eurozone Forecast June 214 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Slovenia Political uncertainty may delay reforms, damaging growth prospects Finland Estonia Latvia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights Slovenia s economic outlook has improved, with GDP growth picking up steadily in H2 213 and recapitalization of the banking sector beginning in December. As a result, we have raised our growth forecast for this year to.6% from 1.2% in March, and to 1.2% from.7% for 215, but downside risks remain. GDP growth 214. 6% GDP growth 1. 2% But with the budget deficit likely to exceed 15% of GDP this year, as a result of the recapitalization of the banking sector, we remain cautious about the outlook for domestic activity. We expect private spending and fixed investment to fall this year, and unemployment to remain close to 1%. 215 Political uncertainty has risen. The prime minister lost the leadership of her party in April and resigned in early May. General elections have been called for July, and this may hinder the reform process. Export volumes improved notably in H2 213, helped by stronger demand from within the Eurozone. We think that exports will to continue to improve, driving the return to growth in 214 after two years of recession. Household spending fell in 213, but a.4% quarterly gain in Q4 213 suggests that spending has stabilized. Indeed, retail sales volumes rose by.6% on the quarter in Q1 214, helped by stronger consumer confidence since Q3 213. Headline inflation eased to.5% in April, raising concern about a period of deflation. Domestic price pressures are likely to remain muted, due to spare capacity and modest demand, but we expect Slovenia to avoid deflation. A slowdown in real wage growth has not been enough to reverse a previous rise in unit labor costs, eroding competitiveness. We forecast that GDP will not return to its 28 level until 218, with growth seen accelerating only slowly to 3.3% in that year. Having risen to 6.4% of GDP in 213, the current account surplus is forecast to climb to 8.2% of GDP this year and is likely to persist in 215 18, due more to weak domestic demand than stronger exports. 214 Unemployment 1. 6% Consumer prices 214. 9% EY Eurozone Forecast June 214 Slovenia 1
Political uncertainty may delay reforms, damaging growth prospects Economic outlook is brighter, led by exports Although GDP fell by.9% in 213, quarterly growth picked up steadily through the year, rising from.1% in Q1 to 1.2% in Q4. In particular, export volumes improved notably in the second half of the year, helped by stronger demand from the rest of the Eurozone and the US. We forecast that exports will continue to improve in 214 as global activity accelerates, driving Slovenia s return to growth after two years of recession. As a result, we have raised our GDP growth forecast for this year to.6% up from the 1.2% seen in our March report,. We have also raised our 215 forecast from.7% to 1.2%. Household spending fell by 2.9% on the year in 213, but a.4% quarterly rise in Q4 offers hope that spending has stabilized. Indeed, seasonally adjusted retail sales Table 1 volumes rose by.6% on the quarter in Q1 214, up from a.6% quarterly contraction in Q4 213, helped by consumer confidence trending upwards since Q3 213. Construction activity has picked up, but austerity and unemployment will constrain growth Construction volumes rose by more than 3% on the year in January and February 214, after rising by 21.2% in Q4 213. This comes after almost four years of contraction. And fixed investment recovered in H2 213 to post only a small decline in 213 as a whole, after falling by more than 5% in both 211 and 212. European Union funding for local projects totaled 1.1b in 212 and 213, which is equivalent to around 1% of fixed investment. This monetary support, alongside greater confidence across the whole Eurozone, boosted broader private sector investment by getting a larger number and variety of projects started. But with the budget deficit likely to exceed 15% of GDP in 214, as a result of the recapitalization of the banking sector, we are cautious about the immediate outlook for domestic activity and expect private spending and fixed investment to fall this year. Having averaged 1.2% in 213, unemployment eased slightly to 9.7% in Q1 214, but we expect the rate to remain close to 1% for the year. Change in government may delay reforms In late April, the prime minister lost the leadership of her party. In early May she resigned to allow the electorate to choose Slovenia (annual percentage changes unless specified) 213 214 215 216 217 218 GDP.9.6 1.2 1.8 2.8 3.3 Private consumption 2.9.7.8 1.5 2.3 2.9 Fixed investment.2 2.2 2.4 4.4 4.9 4.6 Stockbuilding (% of GDP).9 1.3 1.8 2.5 2.5 2.1 Government consumption 2. 3.8.1 1.4 2.5 2.9 Exports of goods and services 2.7 3.9 3.5 3. 2.7 2.5 Imports of goods and services 1..9 2.7 2.8 2.8 2.8 Consumer prices 1.8.9 1.6 2. 2.4 2.5 Unemployment rate (level) 1.2 1.6 1.4 9.9 8.9 8. Current account balance (% of GDP) 6.4 8.2 8.9 9.2 9.1 8.8 Government budget (% of GDP) 4.4 15.2 4.6 3.5 3.2 3.2 Government debt (% of GDP) 67.1 81.3 75.6 71.1 68.9 68.2 ECB main refinancing rate (%).5.2.1.1.4 1.4 Euro effective exchange rate (1995 = 1) 12.8 125.3 123.7 122.4 121.7 12.9 Exchange rate ($ per ) 1.33 1.37 1.34 1.32 1.31 1.29 2 EY Eurozone Forecast June 214 Slovenia
a new Government and leader. As a result, general elections have been called for July. The short 13-month term of the outgoing prime minister reflects the fragmented nature of Slovenia s political scene and the many differences in opinion about the reform agenda. This political uncertainty might hinder the reform process. Slow progress toward privatization Of the 15 state firms listed for privatization, only 2 have been sold so far. It is important that the privatization process continues, both because the funds are essential to reduce government debt (which rose to 67% of GDP in 213) and to improve the efficiency of the economy by reducing the links between politics and business. Political uncertainty could further hinder the privatization program. The new Government is likely to be another coalition, which will probably slow the decision-making process. Banking reforms depend on support from global markets Slovenia s much-needed banking reforms began in December 213. The Government injected 3.2b into the 5 largest banks to cover immediate concerns revealed by the stress-test results. Since December, about 3.5b in bad loans have been transferred from individual banks to the newly established bad bank. More reforms are due. But confidence is fragile, particularly with the political situation so uncertain, and continued market access is likely to hinge on elections running smoothly. The stress tests estimated that the total cost of recapitalizing the banking sector would be 4.8b. We expect this to push the fiscal deficit to around 15% of GDP this year. The Government was hoping to reduce the deficit to 4.1% of GDP next year, but, given the uncertain political scene and the risk this poses to the reform agenda, we are more cautious. We expect a deficit of 4.6% of GDP next year and 3.5% in 216. The threat of deflation provides additional risk We expect Slovenia to avoid sliding into a damaging deflationary spiral, but nonetheless a period of sustained low inflation poses a risk to the outlook. The headline inflation rate eased to.5% in April and prices of housing and utilities, food and drink, clothing and footwear, and communications all fell, raising concern about a period of deflation. The strong euro is lowering the price of imports, including fuel, and is reducing headline inflation. Moreover, in July, last year s one-off increase in value-added tax will drop out of the annual comparison. Figure 1 Real GDP growth Figure 2 Government budget balance % year 15 Forecast b 1. Forecast % of GDP 2. 1 5 Slovenia 1. 2. 3. % of GDP (right-hand side) 2 4 6 4. b (left-hand side) 8 5 Eurozone 5. 6. 1 12 7. 14 1 2 22 24 26 28 21 212 214 216 218 8. 2 23 26 29 212 215 16 Table 2 Forecast for Slovenia by sector (annual percentage changes in gross added value) 213 214 215 216 217 218 GDP.9.6 1.2 1.8 2.8 3.3 Manufacturing 1.2 4.6 3. 2.7 3.6 3.6 Agriculture 3.7 3.7 1..4.8 1.8 Construction 7.1 1.6 1.1 2.1 4.6 4.3 Utilities 3. 2. 1.6 1.9 2.8 3.5 Trade.4.1.7 1.3 2.4 3.1 Financial and business services 1.8.8 1.3 1.6 2.4 3. Communications 5. 1.3 2. 2.8 3.6 4.6 Non-market services.8 3..6 1.1 2.1 3.1 EY Eurozone Forecast June 214 Slovenia 3
Political uncertainty may delay reforms, damaging growth prospects Domestic price pressures are likely to remain muted due to the amount of spare capacity in the economy, as evidenced by high unemployment. The jobless rate is expected to remain close to 1% in 214 18, putting downward pressure on nominal wages, which are a key driver of core inflation. Nevertheless, real wage reduction since the slowdown has not been enough to reverse a previous rise in unit labor costs, which has eroded Slovenia s competitiveness within the Eurozone. Average hourly labor costs of 14.6 in 213 (on Eurostat s last comparison) were only around half those in Germany ( 31.3) and Italy ( 28.1), but above those of Portugal ( 11.6) and most eastern member states. Labor market, pensions and health care reforms are needed Reforms to the labor market and pensions have been encouraging in recent years, but additional measures are necessary to boost long-term growth and help relieve fiscal pressures. The corruption probes that have been instigated against a number of key politicians have weakened the support for several political parties, and there are signs that key groups that have traditionally been resistant to structural change in the past, particularly trade union leaders, may be more willing to cooperate with reforms to wage bargaining and pensions due to the weak economic situation. The Government has started making plans to set up a demographic reserve fund to cover pension funding once the indexation freeze on pensions ends at the end of 215. The Government has also prioritized reducing youth unemployment, which is currently around 2%. GDP growth to recover slowly to 3.3% in 218 Downside risks are high and fixed investment remains almost 5% lower than its 28 peak, which is likely to constrain growth in the medium term. We forecast that the Slovenian economy will not return to its 28 level until 218. GDP growth is seen accelerating only very slowly, to a little over 3% in 218. Having risen to 6.4% of GDP in 213, the current account surplus is forecast to climb to 8.2% of GDP this year as the export recovery is likely to continue to outpace the much more subdued pickup in imports. And the surplus will probably likely to persist over the medium term, although this is more a sign of weak domestic demand than export strength. Indeed, the unusual combination of fiscal deficit and external surplus highlights the protracted problems of the private sector, where the combination of subdued investment and higher saving will continue to constrain the recovery of domestic spending over the medium term. Figure 3 Private consumption and total fixed investment Figure 4 Current account balance % year 3 Forecast US$b 6 Forecast % of GDP 18 5 15 2 Total fixed investment 4 12 1 3 2 % of GDP (right-hand side) 9 6 1 3 1 Private consumption 1 3 2 3 2 22 24 26 28 21 212 214 216 218 2 3 4 US$b (left-hand side) 2 23 26 29 212 215 218 6 9 12 4 EY Eurozone Forecast June 214 Slovenia
EY Forecasts in focus: macroeconomic data and analysis at your fingertips App EY Forecasts in focus gives you swift access to the data and analysis from EY s Eurozone Forecast and Rapid-Growth Markets Forecast on your tablet. Download the EY Forecasts in focus app at ey.com/eurozone. Compare economic indicators for the 18 Eurozone countries and 25 rapid-growth markets. Create tailored charts and tables for a broad range of economic indicators based on data from 2 to the present and make forecasts up to 218. Use the app to improve your own business planning and share customized information with clients. Web Highlights, data and other information from the EY Eurozone Forecast. Other EY publications Rapid-Growth Markets Forecast EY Eurozone Forecast: Outlook for financial services
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 214 EYGM Limited. All Rights Reserved. EYG no. AU2489 EMEIA Marketing Agency 11127 ED None In line with EY s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. About Oxford Economics Oxford Economics was founded in 1981 to provide independent forecasting and analysis tailored to the needs of economists and planners in government and business. It is now one of the world s leading providers of economic analysis, advice and models, with over 7 clients including international organizations, government departments and central banks around the world, and a large number of multinational blue-chip companies across the whole industrial spectrum. Oxford Economics commands a high degree of professional and technical expertise, both in its own staff of over 8 professional economists based in Oxford, London, Belfast, Paris, the UAE, Singapore, New York and Philadelphia, and through its close links with Oxford University and a range of partner institutions in Europe and the US. Oxford Economics services include forecasting for 2 countries, 1 sectors, and 3, cities and sub-regions in Europe and Asia; economic impact assessments; policy analysis; and work on the economics of energy and sustainability. The forecasts presented in this report are based on information obtained from public sources that we consider to be reliable but we assume no liability for their completeness or accuracy. The analysis presented in this report is for information purposes only and Oxford Economics does not warrant that its forecasts, projections, advice and/or recommendations will be accurate or achievable. Oxford Economics will not be liable for the contents of any of the foregoing or for the reliance by readers on any of the foregoing. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com