Inflation and GDP growth in FBiH due to minimum wage increase

(Patria) - The annual real Gross Domestic Product (GDP) growth rate of Bosnia and Herzegovina in the first quarter of this year will be 2.6 percent, and inflation is expected to grow to 3.9 percent in that period, predominantly as a consequence of the increase in the minimum wage in the Federation of BiH.

The Central Bank of BiH published a rapid estimate of GDP for the fourth quarter of 2024, the first quarter of 2025, and inflation for the first half of 2025.

CBBH estimates the annual real economic activity growth in the fourth quarter of 2024 at 2.6%. In line with the forecast for the last quarter of 2024, the annual real GDP growth for 2024 is estimated at 2.5%, which is almost identical to the projection from the autumn round of medium-term macroeconomic projections (2.4%).

The preliminary estimate of the annual real GDP growth rate for the first quarter of 2025 is 2.6%, primarily due to the continued growth of the service sector activities and average real wages.

- We estimate that total inflation could be 3.6%, and core inflation 3.9% in the first quarter of 2025. The significant deviation of the estimated inflation in the first quarter compared to the previous round of rapid estimates is due to the sudden increase in the minimum wage for 2025.

According to preliminary estimates, a significant increase in total and core inflation is also expected in the second quarter.

There is a significant risk of upward revision of inflation and downward revision of economic activity with rapid estimates for the second quarter.

In this round, we had to rely significantly on expert estimates of the effects of minimum wage increases on the labor market, without having any shock of similar magnitude in the past to compare. Additionally, data for industrial production were not available for January, and current local and global political trends can also result in significant shocks – stated CBBH.