Economy records sharpest contraction since Covid-19 pandemic in Q1

GDP shrinks in Q1: GDP unexpectedly contracted 0.7% year on year in the first quarter (Q4 2024: +1.5% yoy), marking the worst result since the pandemic-induced dip in Q4 2020 and ranking as the worst performance in the Euro area. On a seasonally adjusted quarter-on-quarter basis, economic activity dropped 0.8% in Q1, contrasting the previous period's 0.3% growth and also marking the largest downturn since Q4 2020.

Swathes of the economy shrink: The year-on-year decline was broad-based. Domestically, household consumption—which accounts for more than 50% of GDP—grew at a weaker pace of 0.4% in Q1 (Q4 2024: +1.2% yoy), hampered by higher inflation compared to the prior quarter. Moreover, public spending decelerated to 2.6% (Q4 2024: +5.7% yoy), the worst result in more than a year. Meanwhile, fixed investment dropped at a marginally slower pace of 5.1% in Q1 (Q4 2024: -5.2% yoy), logging the fourth successive quarter of contraction on the back of a subdued construction sector. On the external front, goods and services exports growth almost screeched to a halt, dropping to 0.1% in Q1 (Q4 2024: +3.9% yoy) and marking the worst reading in a year. Meanwhile, imports of goods and services growth moderated to 1.9% in Q1 (Q4 2024: +2.3% yoy).

GDP to gain momentum in 2025: Our panelists expect the economy to improve from Q1’s slump in Q2. That said, U.S. car tariffs are likely posing headwinds to Slovenia’s economy in the quarter. In 2025 as a whole, our Consensus is for the economy to gain momentum from 2024. ECB rate cuts, EU funds and military spending should ignite a rebound in fixed investment and fuel private consumption. Still, the economy’s engine will not be firing on all cylinders—government spending momentum is expected to fade, leaving GDP growth relatively subdued. A sharper-than-expected slowdown in EU demand looms as a key downside risk.

Panelist insight: Commenting on the outlook, Alen Kovac, analyst at Erste Bank, stated: “Looking further into this year, we continue to see domestic demand remaining [a] key growth engine, with private consumption maintaining steady growth momentum, coupled with the anticipated improvement of the investment profile. Opposed to that, challenges regarding the external demand developments should continue to weigh on the export outlook, thus keeping the net exports contribution toned down in period ahead. Disappointing 1Q25 output [suggests] downward revision of our current FY25 growth forecast.”

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