CBBH expects the continuation of the economic activity recovery trend compared to the spring of 2020

The Central Bank of Bosnia and Herzegovina (CBBH) has enriched its diagnostic tools with a model for rapid estimates of key macroeconomic variables. From the first quarter of 2021, once in a quarter, we plan to publish estimates on current economic activity, primarily the dynamics of real GDP and inflation in BH. Currently, the CBBH estimates that real GDP, on an annual level, in the fourth quarter of 2020 is lower by 3.77%, while the decline in the first quarter of 2021 is 3.23%. We expect the deflationary period to continue during the first quarter of 2021, with an estimated average annual inflation of -1.31%.

Graph  1: Quick Projection of the Real GDP Annual Change

Source: CBBH. Note: 1 standard deviation includes the 68%  reliability interval,  and  2 standard deviations include the  95% reliability interval.

The CBBH uses a set of available monthly indicators, which have proven to be good projectors of economic activity in the relatively recent past, in order to assess the intensity of economic activity until the current quarter. The projection from the Graph above, which we use as a quick estimate of current economic activity, is the result of an average of projections from a maximum of five separate models. The variables used in the models, but also in the projections in different periods, change, but we use those, which, based on historical data, show that they best explain the expected pattern of economic activity.

In periods of strong and frequent turmoil, such was 2020 due to the pandemic, the volatility of most indicators of economic activity is significant. High uncertainty regarding higher frequency data projections, even if we can be sure that there will be no additional restrictive measures in the near future, due to the epidemiological situation, makes their predictability power weaker. As the current epidemiological situation is completely uncertain, we decided on a balanced distribution of possible risks of the average projection. In particular, this in the Graph above means that we currently assume the same probability that the actual value of economic activity, once official data is available, will be above as well as below our average projection.

The range of the projection reliability interval, presented here with +/- 1 or 2 of standard deviation of the short-run projections from the different models, on which basis we calculated the average value, is not too wide under the current circumstances. We estimate with 68% reliability that the decline of economic activity in the fourth quarter of 2020 will be in the range of +/- 1.2 percentage points around our average projection. As the projection horizon grows, the uncertainty of the projections grows. Therefore, with 68% of reliability, we estimate that the decline in economic activity in the first quarter of 2021 will be in the range of +/- 1.5 percentage points around our average projection. In any case, we do not expect positive annual growth rates of economic activity until the end of the first quarter of 2021. Nevertheless, there are noticeable signs of a continuation of the recovery trend after a dramatic drop in activity in the second quarter of 2020.

Unlike the model for medium-term projections, which we publish twice a year, for the current and next two years, the model for rapid short-term estimates of current economic activity is primarily used to assess the dynamics of real GDP and inflation in the current or previous quarter. Official data on quarterly GDP, published bynationalstatistical agencies in BH and other countries, are usually available with a significant time lag. The delay in publishing official data after the end of the quarter makes it difficult to assess the state of the economy and make medium-term and long-term projections. Consequently, the planning and assessment of the effects of economic policies in the country may be subject to numerous revisions. We use quick short-term projections of key macroeconomic variables in the CBBH until the publication of official statistics, or a new round of short-term projections.