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Central Bank Projects 1.8% Contraction for 2012 (adds)

Ljubljana, 01 October (STA) - The Slovenian economy is expected to contract by 1.8% this year and a further 0.7% in 2013 before rebounding, the central bank forecast on Monday. This is a significant downgrade from its spring projections, when it forecast that the economy will shrink by 1.2% this year and return to growth in 2013.

Forecasting is very difficult in this period of uncertainty. "It is unclear how the world economy will change and the domestic situation is just as uncertain," Banka Slovenije Governor Marko Kranjec told the press as he presented the twice-a-year price stability report.

The downgrade is a result of the weakness of the global economy and the decline in domestic demand, which has been driven by fiscal consolidation, according to Damjan Kozamernik, the head of the central bank's analytical department.

The forecast for this year is on par with the projections of other institutions, but "forecasts for next year, which are very wide apart, suggest considerable uncertainty," he said in view of the uncertainty in the eurozone and beyond.

The government Institute of Macroeconomic Analysis and Development (IMAD), for example, forecasts that output will decline by 1.4% next year.

Inflation is projected at 2.9% this year, up 0.6 points over the spring forecast, and 2.3% in 2013. Although it increased in the short term, it is still low compared to the euro area, Kozamernik pointed out, adding that the economy was "gaining in price competitiveness".

However, Kranjec noted that local inflation was rising as a result of increases in utility costs. "In Ljubljana [utility] companies are seen as profit makers," he said. "I recommend that the government introduces an appropriate system of regulation."

Unemployment has risen beyond initial projections this year even though the downturn is not as severe as it was at the outset of the crisis. "We expect employment to drop by 1.5% of the labour force," Kozamernik said.

Unemployment measured with the labour force survey, which stood at 8.2% at the end of the second quarter, is expected to "approach 10% in the next two years," he said.

"It is urgent to prevent a permanent rise in unemployment; this would pose a huge social problem, but it would also be a great economic and fiscal problem," according to Kozamernik.

Turning to public finances, Kozamernik said the deficit reduction followed a favourable trajectory and was sustainable, "but it is unclear how this will affect domestic consumption and economic activity".

He said the government's deficit target was feasible, but additional measures would be needed.

Vice-Governor Mejra Festić added that this meant revenue-side measures. The central bank deems an increase in the general VAT rate urgent in terms of budget revenue, she said.

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