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Slovenia Business Week no. 36: GDP Growth Robust but Heading for a Slowdown

the year, however the Institute for Macroeconomic Analysis and Development (IMAD) believes the pace will slow down somewhat early next year, in particular due to the VAT hike in Germany

The latest data suggest that the pace of GDP growth is as brisk as it was at the beginning of the year, however the Institute for Macroeconomic Analysis and Development (IMAD) believes the pace will slow down somewhat early next year, in particular due to the VAT hike in Germany.

Due to the value added tax increase in Germany investors and consumers are pushing back spending before the expected price increase, which has boosted exports orders in Slovenia, IMAD director Janez Sustersic told the press on Thursday, 9 November as he presented Autumn Report 2006, the in-depth analysis of the think-tank's September economic forecast that the government confirmed on 9 November.

The strong export growth is one of the reasons why the economy is on track to expand by 4.7% this year with inflation at 2.7%, which IMAD forecast in September. What is more, oil prices dropped soon after the September forecast, so inflation is indeed lower than projected, Sustersic said.

In 2006 growth is projected to slow down to 4.3%, but this is still higher than IMAD expected earlier this year. Sustersic said that the impact of the international environment, which was crucial this year, will be lower, but tax laws will kick in and boost domestic spending.

According to Sustersic, the lower income tax rates will contribute 0.3 percentage points to private consumption, which is still within the framework of macroeconomic sustainability and poses no risk to the overheating of the economy.

On the other hand, the effects of the new corporate tax act, which will gradually cut the rate from 25% to 20% in 2010, will not have an impact on investment spending in 2007 as the general investment relief has been phased out. It is expected that the impact will be felt in 2008, Sustersic said.

Another positive factor will be the ongoing phasing out of the payroll tax, which will be abolished in 2009. The labour market will meanwhile receive a boost in the form of greater work activity as a result of lower taxes.

The main factor of risk in 2007 is pressure on consumer prices following the introduction of the euro on 1 January, and the full liberalisation of the electricity market in July. However, IMAD believes that the risks are small so they were not taken into account in the forecast for 2007.

Source: Slovenian Press Agency STA

Author: STA, Slovenian National Press Agency