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Slovenia Business Week no. 17/2005: Central Bank Upgrades Inflation and GDP Growth Forecast for 2005

According to the central bank, growth of GDP is to amount to 3.9% this year, up 0.1 percentage points from its autumn forecast

The Bank of Slovenia has upgraded its forecast for inflation and GDP growth for this year in its spring forecast released on Friday, 22 April. Governor Mitja Gaspari said that the country should have no trouble with the euro changeover in 2007, but it cannot afford to make any mistakes this year in economic policies or social dialogue.

According to the central bank, growth of GDP is to amount to 3.9% this year, up 0.1 percentage points from its autumn forecast. Growth is to accelerate to 4% in the following two years.

Real wage growth is somewhat above expectations, but it is still lagging behind productivity, according to Damjan Kozamernik, the head of the central bank's analytical department. He said wages in the public sector have been low in the recent period, which is a good signal for the private sector.

According to the central bank, growth will be propelled in particular by domestic consumption, which is expected to grow fast due to solid wage growth and cheap loans. Investment growth will start to slow down due to lower interest rates, while lower foreign demand will reflect on slower export growth, Kozamernik said.

The bank's forecast for inflation is at 2.4% for this year, rising to 2.6% in 2006 and 2.8% in 2007. According to Kozamernik, macroeconomic factors have had a positive impact on inflation, in particular the gap between demand and supply.

The main risks that could push inflation higher are oil and raw material prices, higher domestic consumption, transfer of higher labour costs into prices and fiscal factors.

Any such shock would jeopardise the price stability criteria for euro adoption, the only Maastricht criterion that Slovenia is not complying with at this point, Kozamernik stressed.

Gaspari noted that inflation slowed down at a slower pace in 2004 and early 2005 than the year before, but it was still in line with expectations. Higher raw material costs exerted inflationary pressure, but restrictive economic policies coupled with certain structural macroeconomic factors kept it in check.

Slovenia is expected to be in compliance with all Maastricht criteria in the second quarter of 2006, which is soon enough, Gaspari believes. Once the criteria are met, the Bank of Slovenia estimates inflation to remain at between 2.5% and 3% for several years.

If we are to develop faster than our partners in Europe, we have to grow faster but also adjust, that is raise, certain prices, Gaspari said when he explained the somewhat higher expected inflation rate following the euro changeover.

He said Slovenia must keep the promise it made when it entered the ERM II exchange rate mechanism and abandon the indexation of social transfers. It also has to carry out structural and market reforms, while the government and Bank of Slovenia have to pursue coordinated economic policies.

Wages are the most sensitive area, according to Gaspari. The agreement on wages in the public sector should be followed by a similar deal for the private sector, he thought.

Gaspari furthermore urged caution in pension reform. It would be a shame if the effects of the 2000 pension reform were to be diluted when new changes are made to the pension system, he said, adding that it is impossible to sustain a policy that equates wage with pension growth.

The governor moreover called for greater use of public-private partnership in the public sector if Slovenia is to retain fiscal stability and high wage growth. Not everything in the public sector needs to be funded with public money, he stressed.

The central bank's growth and inflation estimates are on a par with those of the government Institute for Macroeconomic Analysis and Development (IMAD), although the bank of Slovenia is somewhat more upbeat.

IMAD says in its spring forecast that growth of GDP will be at 3.8% this year (compared with the central bank's 3.9%), while the inflation estimate has been put at 2.5%, one percentage point higher than the central bank's.

Source: Slovene Press Agency STA

Author: STA