Central Bank of BiH projects higher level of economic activity

(Patria) - The Central Bank of Bosnia and Herzegovina (CBBH) in its latest projections expects significantly stronger economic activity in the medium term, compared to the previous round of projections, but also stronger inflationary pressures in 2023.

- The previously published medium-term projections of key macroeconomic variables of the CBBH (November 2022) for 2022 were 4.1 percent for real economic activity and inflation of 14.4 percent for 2022, and were almost identical to the later published official data (real GDP growth of four percent and inflation of 14 percent). Compared to the previous round of projections, the values of all key macroeconomic variables have been slightly adjusted for 2023 and 2024 - according to the "Spring Round of Macroeconomic Projections for 2023-2024".

The projection for economic activity growth has been slightly revised upwards from 0.9 percent to 1.6 percent, although the projected value still indicates a significant slowdown in growth. The projection for economic activity in 2024, which has been revised upwards by as much as 2.2 percentage points, to a level of 3.2 percent, is still considered modest, given the country's level of development.

- Trends in key macroeconomic variables are unchanged compared to the projections from November 2022. The trend of economic activity of our main trading partners is similar, which significantly affects some of the main components of national accounts in our country, primarily net exports, where we project a slowdown in trade growth. The projected higher rate of personal consumption growth in 2023, compared to the previous projection, is partly due to the revision of official data - state the CBBH.

Personal consumption, which is the largest macroeconomic aggregate, is projected at 2.5 percent in the current year. The expectation of moderate growth in personal consumption is a consequence of high inflation and the lagging growth of nominal wages behind inflation, although growth has been recorded in most activities since the beginning of 2022. Continued growth in average wages, as well as a decrease in unemployment, is expected in the projection period, although unfavorable age structure of the population and demographic trends are factors that continuously suppress personal consumption.

In the European Union, a significant slowdown in economic activity is still expected in 2023, although lower energy prices, reduced supply constraints, and a strong labor market have contributed to moderate growth in the first quarter of 2023. Compared to the available information during the preparation of the autumn round of macroeconomic projections at the CBBH, no recession is expected in the EU and its largest member states, and the growth of real GDP for 2023 has been revised upwards.

Consequently, expectations of stronger foreign demand have also had a positive impact on economic activity projections in BiH. Risks to economic growth in the EU remain high, given the uncertainty regarding the development of geopolitical instability, growing risks of vulnerabilities in the financial system, and persistent inflation, which could encourage further interest rate hikes and have a negative impact on disposable income and consumption trends.

After reaching a peak of 14 percent in 2022, inflation measured by the consumer price index is projected at 7.7 percent in 2023, which is 1.6 percentage points higher than the value from the previous projection. Official inflation in the first quarter of 2023 was 12.4 percent, and the CBBH expects it to gradually decrease during the projection horizon.

The increase in the inflation rate compared to the previous round of projections is based on the continued rise in food prices, which are expected to be 12 percent higher on an annual basis in 2023, as well as the growth of core inflation. The projected growth in energy prices in the current year is 1.7 percent. In a period of declining energy prices, inflationary pressures are still significant due to the very pronounced growth of core inflation.

- A significant increase in core inflation indicates that overall inflation in BiH is not high solely due to shocks in the prices of goods traded on international markets. The publication of the results of the next round of medium-term macroeconomic projections, for the period 2023-2025, with a possible revision of annual projections of key macroeconomic variables for 2023 and 2024, is planned by the CBBH for November 2023 - state the CBBH.