June 9 (Bloomberg) -- Slovenia’s economy entered a recession for the first time in more than 16 years as the worst post-war downturn in the European Union sapped demand for its exports and investments slumped.

Gross domestic product shrank an annual 8.5 percent, following a 0.8 percent contraction in the last quarter of 2008, the statistics office said on its Web site today. The median estimate of eight economists in a Bloomberg survey was for a 5 percent drop. The economy shrank 6.4 percent from the previous quarter.

“Investments have dropped off a cliff and overall data are horrific, suggesting the economy is likely to contract by close to 10 percent this year,” Neil Shearing, an emerging-markets economist at Capital Economics Ltd. said in a phone interview from London. “There’s some good news as the free-fall appears to have slowed in recent months.”

Slovenia, the wealthiest of the eastern members of the European Union with GDP per capita of 18,196 euros ($25,161), is struggling with the worst economic decline since at least 1992 as exports, manufacturing and construction slumped by more than a fifth in the first quarter, according to the government’s forecasting institute.

Regional Recession

The only eastern EU member not in recession is Poland, whose economy accounts for about a third of combined GDP for the 10 former communist states that joined the EU beginning in 2004. Slovenia’s decline is deeper than contractions in Bulgaria, Slovakia, Hungary, Romania and the Czech Republic.

Still, Shearing said Slovenia is “on a more solid footing” than east European countries that have their own currencies such as Hungary or Romania. Shearing expects a sluggish recovery early next year as demand picks up in the EU.

Investment or gross capital formation declined the most with inventories adding to a 32.3 percent slump, data showed. The recession also hit household consumption, which rose at 0.1 percent. Government spending advanced an annual 3.8 percent. The government deficit in the first quarter rose to 6 percent of GDP, compared with 1.3 percent share a year earlier, a separate report by the statistics office said.

Summer Recovery

The Adriatic nation’s economy will recover “in the summer months” as orders for exports increase and business confidence rises, Finance Minister Franc Krizanic said in a June 4 interview. Still, Krizanic said first-quarter GDP results will be bad. He also blamed the harsh winter, which hampered construction that drove the expansion a year earlier when the economy advanced 5.4 percent.

The economy of 16 nations sharing the euro shrank a record 4.6 percent in the first quarter, the EU’s statistics office has said.

“The fact that GDP drop is among the biggest in the EU confirms the openness of a small economy that is relatively unprepared for such a crisis because of the slow pace structural changes,” Bostjan Vasle, the director of the forecasting institute, said in an e-mail after the report.

Slovenia’s economy, which is set to contract 4 percent this year, according to the institute, expanded a record 6.8 percent in 2007, driven by investment and construction.

To contact the reporter on this story: Boris Cerni in Ljubljana, Slovenia at bcerni@bloomberg.net

Last Updated: June 9, 2009 06:18 EDT