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Ernst&Young Projects Slow Recession for 2012

Ljubljana, 28 June (STA) - The Slovenian economy will slide into a slow recession in 2012, from which it will recover next year, according to projects consultancy and auditing firm Ernst&Young. The recession is also to hinder the government's endeavours for fiscal consolidation, the company wrote on Thursday.

After last year's 0.2% growth, the Slovenian GDP is to shrink by 0.5% this year and then turn back up, especially on growing exports, the auditing firm forecasts.

Moreover, growing investments are to bring more solid economic growth from 2014 onwards, shows the macroeconomic projection for Slovenia prepared by Ernst&Young in cooperation with the Oxford Economics institute.

Despite the efforts of the new government to keep the budget deficit at bay, the deficit will increase due to the shrinking GDP and the effects of Slovenia's rating downgrade last year.

The extensive fund-raising last year allowed the government to postpone the issue of EUR 1.5bn in bonds planned for April, points out the company's report, adding that the interest for the bonds on the market will be the key indicator of how much the market trusts the new government.

Inflation is to grow from last year's average of 1.8% to over 2%, and is expected to remain at this level, which analysts believe shows the readiness for higher import prices and long-term stagnation of salaries.

Due to large amounts of bad loans, major Slovenian banks were forced to raise additional capital exceeding 1% of the sector's GDP. Limited bank loans in the coming years will further impede both investment activity and GDP growth, according to Ernst&Young.

Analysts say the new government will have an opportunity to secure the necessary political support for reforming the public sector and the labour market, although this will be hard in the current economic situation.

The presence of the Pensioners' Party (DeSUS) within the coalition will also make comprehensive pension reform difficult, despite being essential to relieving long-term budget strains, the report notes.

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