2012-11-15 00:38:57 - Slovenia Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com
Slovenia faces another year of negative growth in 2012 followed by a lacklustre recovery in 2013 and 2014 owing to both domestic and external headwinds. Household consumption and investment will be hit hard by declining confidence abroad as well as weakening domestic credit channels, which will in turn force the government into even more aggressive fiscal austerity. At the same time, exports are unlikely to enjoy any meaningful recovery as trade dynamics within the common currency area continue to come under pressure.
Alongside the weak economic growth outlook, Slovenia´s government has shown a growing lack of political cohesion in recent months, abandoning a parliamentary vote in late July on the introduction of a balanced budget rule into the constitution and whether
to create a state-run institution which would take over bad loans within the domestic banking sector, owing to a lack of cross-party support.
This has in turn raised the likelihood that Slovenia will be forced to request external financial assistance via the eurozone bailout facility to help recapitalise its banking sector in the next few months. Despite relatively steady inflation in the past few months, we remain confident that consumer price inflation will head gradually lower over the medium term. While food price inflation could rise towards the end of the year, stable energy prices will offset some of the impact. At the same time, weak domestic demand, both from consumers and the public sector will help alleviate demand-pull inflationary pressures.
Major Forecast Changes
On the back of growing domestic and external economic headwinds, we have been prompted to revise down our medium-term growth forecasts for Slovenia. Whereas previously we forecast real GDP growth of -0.7% in 2012, followed by a pick-up to 1.6% in 2013 and 2.5% in 2014, we now envisage a more severe economic contraction this year, to the tune of -1.0%, followed by a more modest recovery over the next few years, with growth of 1.0% and 1.8% anticipated in 2013 and 2014 respectively. Given our weaker real GDP growth forecast in 2013, we have been prompted to revise down our end-2013 consumer price inflation forecast to 1.9% from 2.1% previously.
Key Risks To Outlook
The biggest risk to the Slovenian economy lies abroad. A major deterioration in the eurozone sovereign debt crisis, or even just a greater-than-expected slowdown in the core eurozone nations, would have severe knock-on effects on the Slovenian economy, not only via depressed trade and investment flows, but also via credit channels and broader economic sentiment. If the government fails to pass fiscal and banking legislation at the end of August, we believe there is a high risk of the governing coalition breaking up and fresh parliamentary elections being called. This would severely dent investor confidence in Slovenia, and almost certainly result in a request for financial assistance from the eurozone bailout facility to help recapitalise domestic banks.
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