CBBiH: Economic growth for 2022 revised upwards

The Central Bank of Bosnia and Herzegovina (CBBiH) is publishing the second round of projections of key macroeconomic variables for 2021 and 2022. Economic growth in the current and 2022 is projected to be stronger compared to the projections from May 2021, which were based on quarterly data available at the end of 2020 and information available until the end of April.

According to the current projection, economic activity growth of 5.8% is expected in 2021, which is 2.4 percentage points higher than the projection six months ago. The economic growth projection for 2022 has been revised upwards by 50 basis points compared to the first round of projections from 2021, to the level of 3.9%.

There are two main reasons for such a strong correction of the economic activity projection in 2021. Compared to the official data available in May, at the time of the second round of projections, the decline in economic activity in 2020 was revised downwards from -4.3% to -3.2%. As the decline in economic activity in 2020 due to the pandemic was weaker than initially estimated (by BAM 1.03 billion) according to official data, the growth in 2021 was also more intense due to the base effect. The base effect due to the revision of data for 2020 is particularly strong in the case of investments.

Data from the CBBiH balance of payments statistics suggest that the aforementioned increase in real investments in 2020 relates to domestic investments and government sector investments. The remaining approx. BAM 820 million for which the economic activity estimate for 2021 has been revised upwards is a consequence of the continuation of the strong recovery trend in certain high-frequency indicators, such as industrial production and goods exports, throughout 2021. This recovery is largely due to stronger-than-expected foreign demand throughout 2021, which is also reflected in significant upward revisions of economic activity in the EU. Finally, stronger-than-expected recovery of tourism revenues also significantly contributed to economic activity growth in 2021.

With these upward revisions of projected economic activity rates, the level of real GDP of Bosnia and Herzegovina from 2019 could be exceeded as early as the end of 2021 by as much as BAM 876 million (2.53%). The growth of personal consumption in 2021 is based on positive indicators related to the labor market, the projected decrease in the number of unemployed persons, slight growth in employment and average net salary, and the increase in remittances from abroad. Compared to the previous round of projections, we have revised upwards the recovery of personal consumption by the end of 2022, primarily due to the strong revision of official data for 2019 in the second half of 2021.

According to official data from BHAS, personal consumption continued to grow strongly in the first half of 2021. The projection of personal consumption growth in 2022 is significantly influenced by the base effect and expected trends related to the labor market, credit activity, and remittances from abroad. We remain quite conservative regarding the trend in the unemployment rate, as well as the speed at which the labor force from Bosnia and Herzegovina could be employed in the EU in the short term.

In 2022, we expect more moderate growth in real economic activity due to the absence of the base effect. The projection from May 2021 has been revised upwards primarily due to expectations of stronger investment activity, which is conditioned by the high rate of economic growth in 2021, but also by the removal of obstacles for a stronger entry of foreign investors. The final appointment of the Securities Commission of the Federation of Bosnia and Herzegovina should be particularly emphasized here, which has created the basic prerequisites for stronger activity of foreign investors. With the growth of economic activity, we expect a renewed deepening of the foreign trade deficit in 2022. However, we expect it to be slower compared to the pre-pandemic period due to slightly faster export growth compared to import growth.

Stronger inflation growth is expected in the projection period. The inflationary shock, the possibility of which we indicated in the first round of projections in 2021, has materialized. Although the projected inflation rate of 1.7% in 2021 seems relatively low, considering the strong growth in energy and food prices on international markets, as well as the prices of international goods transport, it should be taken into account that Bosnia and Herzegovina still recorded deflation in the first half of the year.

To a significant extent, due to these deflationary pressures in the first half of 2021, we expect strengthening inflationary pressures in 2022. Inflation projections are consistent with the projected trend in economic activity and prices from energy futures contracts. However, despite the currently prevailing view that inflationary shocks in Europe are of a transient nature, there are still risks of stronger inflationary shocks in Bosnia and Herzegovina, especially in the medium term. Risks are particularly related to electricity prices in the country and the effects of the normalization of the European Central Bank's (ECB) monetary policy.

Our projections so far have proven to be very consistent, even in extraordinary circumstances such as a pandemic. However, we are not in a classic business cycle, and we continue to emphasize that the estimated values of GDP and its components, as well as other macroeconomic variables, are exposed to an extremely high degree of uncertainty, which is related to the development of the epidemiological situation, strong fluctuations in domestic and international demand, and disruptions in international transport and supply chains.

Our assessment of possible deviations from the current projection of economic activity in 2021 is slightly positive, as it may turn out that the exceptionally high annual growth rates of BiH exports characterized the entire 2021. Also, it may turn out that we underestimated the recovery of personal consumption in the current year. We believe that the risks of deviations from the current projection of economic activity in 2022 are balanced.

Among the factors that could contribute to an upward revision of the economic activity projection in the first round of projections in 2022, we highlight the expected significantly higher vaccination rate of the population, and the continuation of the trend of strong industrial production growth and the recovery of the service sector related to the arrival of foreign tourists. On the other hand, a strong inflationary shock could delay the recovery of personal consumption, which would also be the effect of a new wave of the pandemic and restrictions on population movement. Additionally, the narrowing of fiscal space could negatively affect public investments, and the extension of the period of weak economic activity would slow down the credit activity of banks. Significant revisions of our official data could also certainly have an impact on stronger adjustments to our projections.

By the end of November 2021, we expect the publication of the CBBiH macroeconomic projections for 2023. In the coming weeks, projections of EU economic growth will be published, which is one of the key variables representing foreign demand in our model. We do not expect significant revisions of the current projections of economic activity in Bosnia and Herzegovina for 2021 and 2022 after the publication of the autumn round of macroeconomic projections for the EU. According to available information, it is certain that EU economic activity projections for 2021 will also be significantly revised upwards compared to the spring round of projections.