High (energy) prices are dragging on consumption and investments

After a strong economic rebound in 2021, economic growth slowed markedly in 2022, especially in the second half of the year. The main trigger was the Russian invasion in Ukraine that resulted in EU sanctions and Russian counteractions that ultimately lead into the halt of Russian natural gas exports to Germany and Western Europe and a sharp increase in gas and other energy prices. At the end of 2022, Slovenia was very dependent on energy imports that made up 45.5% of its energy consumption. 17.6% of the energy consumed (natural gas, oil and petroleum products) came from Russia either directly or indirectly via Austria. In 2023, Slovakia’s energy dependence should ease thanks to a new gas-delivery deal with Algeria, which should then cover a third of Slovenia’s natural gas consumption. Slovenia also relies on its 15 hydropower plants on the rivers Drava, Sava and So?a. However, should the summer of 2023 be as dry or even drier than the last, domestic electricity production would fall.

Nevertheless, even with this contribution, energy prices have been and probably will remain relatively high. Steep energy and commodity prices drove up total inflation sharply in 2022, taking the inflation rate to around 10% as of June 2022, i.e., its highest level since 2001, when the time series began. Prices are expected to rise further in 2023, albeit at a slower pace, which should reduce the inflation rate, particularly towards the second half of the year. A second factor driving inflation besides energy and other commodity prices should be higher wages, as unions have secured pay rises of between 7% and nearly 15% for the construction and manufacturing sectors for 2023. This is also the result of the lowest unemployment rate in Slovenia since 1991. Private consumption has already suffered from eroding purchasing power due to spiking inflation in 2022 and should remain modest over 2023 even factoring in wage increases. Private investments fell in 2022 and should remain on the moderate side this year. The Slovenian manufacturing sector is highly integrated into German, Austrian and Italian production chains, especially the automotive industry. As all these countries are also experiencing a manufacturing recession, demand for Slovenian products should decrease. This will have an impact on goods exports. The one driver that should help boost economic activity decrease is foreign tourism, which accounts for 10% of GDP. Slovenia’s visitors mainly come from Germany, Austria, Italy, Hungary and the Czech Republic. German and Austrian consumer confidence surveys show that high inflation has less impact on foreign travel than on the consumption of goods.

Tourism is therefore expected to remain robust. Some government support for the economy will also come from the EU Recovery and Resilience Facility. Slovenia will receive a total of EUR 1.8 billion in grants (3.8% of GDP) and EUR 705 million in loans between 2021 and 2024. Furthermore, measures were introduced to subsidise the cost of energy for households and companies, as well as setting prices for basic foodstuffs. No support will come from the ECB, however, which, in 2022, increased its interest rates by 250 basis points to 2.5% for the main refinancing rate in order to stabilise long-term inflation expectations. Further interest-rate hikes are expected to follow in 2023, albeit at a more gradual pace, to between 3.5% and 4.0%. Added to these rate hikes, the ECB will slowly trim its balance sheet by EUR 15 billion per month from March onwards. These monthly reductions are likely to increase over the year.

The fourth consecutive year of a public deficit

The newly-elected government was forced to implement several programmes and packages in 2022 after major street demonstrations clamoured for support measures to cope with high energy prices. This support will further widen the budget deficit as a rise in the capital gains tax, private income tax and taxes on companies that pollute the environment either fail to generate sufficient revenues or have not yet been fully implemented. The deepening public deficit will continue to push public debt wider.

The structural Slovenian current account surplus narrowed sharply in 2022 to slightly below balance, but should widen again in 2023, but only slightly. Lack of demand for Slovenian goods and high prices for import goods should place the trade of goods balance in an unusual deficit. The services trade surplus should, however, increase somewhat. This, on top of an unchanged balance of investment and remittances, should result in only a small current account surplus.

From right-wing populist to liberal-social-democratic government

An early general election took place in April 2022 after the right-wing populist government under Prime Minister Janša faced four no-confidence votes in Parliament in 2021. The newly founded social-liberal-environmental Freedom Movement and its leader Robert Golob won the election from a standing start. The party secured 41 out of the 90 seats in Parliament and formed a coalition with the Social Democrats (7 seats) and the Left party (5 seats). The Italian and Hungarian national minorities Parliament (2 seats) also support the coalition. Janša’s right wing populist SDS won 27 seats and now constitutes the opposition with the Christian-democratic NSi (8 seats).

Other conservative or right-wing parties that supported the former government did not secure a place in Parliament. Robert Golob was appointed Prime Minister in June 2022. While the new liberal and pro-European government eased public tensions and protests over questions of media freedom and the rule of law, new protest movements arose on back of cost of living concerns in the wake of soaring energy prices. Despite the introduction of several support measures for households and companies, and the fact that the Freedom Movement continues to lead the polls ahead of the SDS, it is unclear whether the government coalition will survive until the next general election, planned for 2026. The main risk emanates from the new incumbent party, which consists mainly of political newcomers, and where disagreements could emerge both internally and with coalition partners

Furthermore, in November 2022, the independent politician Natasa Pric Musar, who generally shares the views of the centre-left parties, won the presidential election. She became the first female President - a mostly ceremonial office - in Slovenian history.