Central Bank Projects GDP Growth of 4.6% for This Year

Ljubljana, 26 March

The central bank projects that the Slovenian economy will expand by 4.6% this year, slowing down to 4.4% in 2008 and 4% in 2009. Inflation is to amount to 2.7% this year and next, and 2.6% in 2009, according to the report on price stability which Banka Slovenije unveiled on Monday.

"The basic scenario indicates a continuation of the favourable economic climate. There are risks, which however can be prevented or mitigated with a reasonable combination of economic policies and timely action," Banka Slovenije Governor Mitja Gaspari told the press.
According to Gaspari, supply-side shocks such as labour costs, oil prices, excise duties and administered prices are the main factors which could affect gross domestic product (GDP) growth in the coming years.
"These elements can have a relatively strong impact on changes to what we believe is a good basic scenario," Gaspari added.
The biggest uncertainty is the price of oil: if it increases by 5 US dollars per barrel on average, it would push inflation higher by 0.5 percentage points at the initial stage.
There is also a "moderate probability" of deviation from the basic scenario for labour costs and effects of fiscal policy on prices, said Gaspari.
"This has to do with uncertainty over hikes in excise duties, administered prices and value added tax (VAT). The government is saying it will not raise VAT, but it leaves the option open in the 2008 budget."
A hike in excise duty combined with a VAT increase would contribute 0.7 percentage points to inflation the year that it is raised, he said.
According to Gaspari, free prices will have a bigger impact on inflation trends and administered prices a smaller impact than they used to.
Gaspari warned against calculating the "expected stronger adjustments of electricity prices and excise duties" into wage policies, saying that it will be crucial what the next Social Agreement brings in this respect.
It is also crucial to keep an eye on headline inflation, which increased from a very low level to significantly over 2% last year. According to Gaspari, this would not be a problem had it not been for the knock-off effect on prices of services.
"To a certain extent this was expected due to the introduction of the euro, but it also indicates that the services market is underdeveloped...which could lead to problems in securing the competitiveness of the Slovenian economy in relation to other eurozone members."
The outgoing central bank chief, whose term expires at the end of March, believes that the economy will be pulled forward more by domestic demand than external trade in the coming years.
He believes that the share of investment in GDP growth will contract, while private consumption will expand, but not to the extent that it would jeopardise growth.

Central Bank Projects GDP Growth of 4.6% for This Year

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