February 13 (SeeNews) - The European Commission said on Monday it has raised its forecast for Slovenia's economic growth this year to 3.0% from 2.6% projected in November on the back of private consumption and accelerating investment.
Growth is expected to remain at 3.0% in 2018 supported by a favourable labour market and improving terms of trade, the Commission said in its Winter 2017 Economic Forecast report.
A rise in employment and a wage increase will lift growth in private consumption to 3.2% this year, from 2.7% in 2016. In 2018, however, growth will slow down slightly to 2.9%, it added.
"Increased consumer spending will accelerate import growth, reducing the growth contribution of net exports to close to zero," the Commission noted. "Export growth is expected to remain stable at around 6% in nominal terms as exporters reap the benefits of improved cost-competitiveness."
Private investment is set to rebound, in line with the implementation of some announced large investment projects and still high capacity utilisation, while public investment is also projected to increase and add to overall investment growth.
Slovenia is expected to have ended 2016 with a growth of 2.5%, up from 2.3% in 2015. "The economy maintained a positive momentum in the first three quarters of 2016, driven by rising consumption and exports," the Commission said.
The Commission estimates that Slovenia has closed last year with a harmonised index of consumer prices of -0.2%, one of the lowest in the euro area. This, however, is expected to turn around to an inflation of 1.1% this year and 2.3% next year as energy prices rise.
Despite the positive momentum, risks to the growth forecast exist, the Commission warned. The upside risks are primarily domestic, as public investment could exceed the forecast due to a quicker-than-expected usage of EU funding, but downside risks are mostly external. "Apart from geopolitical tensions which might slow down trade, Slovenia’s trade balance could be negatively affected by rising energy and raw materials prices," it noted.
In terms of the country's budget, the Commission expects the general government deficit to have fallen to 2.0% of GDP in 2016 from 2.7% last year, mainly due to higher-than-expected current revenues, lower-than-expected subsidies expenditure and a large decline in public investment.
Public investment is planned to remain at a low level in 2017, growing around 6% after a 40% plunge in 2016. "This, coupled with buoyant tax revenues and social contributions, is expected to result in a further decline of the government deficit to 1.7% of GDP in 2017."
In 2018, under a no-policy-change assumption, the general government deficit is expected to decrease to 1.4% of GDP mainly due to economic growth and improved labour market conditions, while public investment is expected to pick up.
The Commission cautioned that main downside risks to public finances over the forecast horizon stem from remaining uncertainties regarding the fiscal implications of the activities of the Bank Asset Management Company and possible one-off expenditures from ongoing court cases.
In structural terms, Slovenia’s fiscal position is expected to worsen from 2016 to 2018. "The deterioration of the structural balance is mostly due to the large change in the output gap, which is projected to turn positive in 2017," the Commission noted.
The debt-to-GDP ratio, which is expected to have peaked at 83.1% in 2015, is forecast to decline continuously to 76.7% in 2018, supported by the economic recovery and a reduction in precautionary cash buffers, the Commission concluded.