OECD Economic Outlook, Volume 2025 Issue 2

Slovenia

GDP is expected to grow by 2.3% in 2026 and 2027, driven by domestic demand. Private consumption will rise with robust real wage growth from a tight labour market, although this will keep inflation elevated. Investment will strengthen, supported by improving foreign demand, post-flood reconstruction and EU funds. A risk is higher inflation from stronger-than-expected wage growth.

Fiscal policy is likely to remain broadly neutral in 2025-27. Defence outlays will rise from 1.4% of GDP in 2025 to 1.8% in 2026, funded by debt. Financing additional defence spending through spending cuts elsewhere would help ensure fiscal sustainability. Reducing the labour tax burden, financed by higher consumption and immovable property taxation, would support growth. Investment would benefit from regulatory reforms, such as simplifying permitting processes.

The economy is facing headwinds

After weak growth caused by falling exports in the first half of 2025, economic activity expanded by 0.8% quarter-on-quarter in the third quarter due to resilient domestic demand and an improvement in exports. Domestic demand benefitted from strong investment and post-flood reconstruction spending. A tight labour market, with a 3.1% unemployment rate in September, and public pay reform drove 7.2% year-on-year nominal wage growth in the first half of 2025. Strong wage dynamics contributed to annual services inflation of 3.7% in October. Annual headline inflation, at 3.1%, also reflected higher food prices, and higher energy prices due to base effects. Real wage growth has outpaced labour productivity growth and further pressured cost competitiveness. Recent high-frequency data is positive, with industrial production and business sentiment improving in September compared to August.

Slovenia

Source: Statistics Slovenia; OECD Economic Outlook 118 database; OECD Labour Statistics database; OECD Prices Statistics database; and OECD calculations.

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Slovenia: Demand, output and prices

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Foreign demand weakness has weighed on activity. Direct US trade exposure is limited, with exports to the US accounting for 1.2% of GDP in 2023. US tariffs affect Slovenia mainly through European value chains. Merchandise and services export volumes rose by 0.4% quarter-on-quarter in the third quarter of 2025, following declines in the first half of 2025, reflecting subdued industrial production in key trading partners such as Austria, Germany, and Italy.

The fiscal stance will be broadly neutral

Fiscal policy has been expansionary in 2025, as weak economic activity slowed revenue growth while spending increased due to higher public wages and social spending. In 2025-2027, fiscal policy is expected to be broadly neutral despite higher spending on defence, public wages, long-term care and post-flood reconstruction. Reconstruction is financed through a temporary rise in the corporate income tax rate and the introduction of a temporary bank levy. Defence spending will increase from 1.4% in 2025 to 1.8% in 2026, financed by debt. Other structural measures include a 0.5% of GDP increase in public wages in both 2025 and 2026 due to public pay reforms, and higher long-term care spending of 0.2% of GDP in 2025 and 1% of GDP in 2026, funded by a 2 percentage point rise in the social security contribution rate. The introduction of a tax and social security contribution-exempt 14th salary (Christmas bonus) for workers and pensioners in 2025 will somewhat ease the effective labour tax burden. However, as the reform is not financed by offsetting measures, it reduces budget revenues and raises fiscal spending. The public debt ratio (according to Maastricht definition) is projected to decline to 65% of GDP by 2027.

Domestic demand will drive growth

Growth is projected to strengthen to 2.3% in 2026 and 2027, driven by domestic demand. Private consumption will rise, as robust wage growth reflects a tight labour market. The resulting wage pressures will keep inflation above 2% in 2026 and 2027. Stronger external demand should support a gradual recovery in the export-oriented sectors, while investment will rebound due to improving foreign demand, favourable financial conditions, post‑flood reconstruction, and EU funds. Downside risks include weaker demand from European trading partners and higher inflation from stronger-than-expected wage growth. On the upside, higher participation of older workers in the labour market and immigration could ease wage pressures and help competitiveness.

Balancing fiscal consolidation with growth-friendly regulatory reforms

Faster fiscal consolidation is needed to ease demand pressures and rebuild fiscal buffers. Additional defence spending should be offset by cuts to other government spending. These efforts should be paired with growth-friendly tax reforms to reduce the labour tax burden, funded by higher consumption, environmental and recurrent immovable property taxation. Investment would benefit from regulatory reforms, such as streamlining planning and permitting procedures.