Projections of economic activity in BH for 2021 and 2022 revised upwards

The Central Bank of Bosnia and Herzegovina (CBBH) announces the first round of projections of key macroeconomic variables in 2021, for the current year and 2022. It is estimated that economic growth in the current year, and in 2022, will be somewhat stronger compared to the projections from November 2020, which were made on the basis of available data from the middle of 2020.

According to the current projection (Table 1), economic activity is expected to grow by 3.4% in 2021, which is 70 basis points higher than projected six months ago. Although the beginning of 2021 is also affected by the corona crisis, a stronger-than-expected recovery in certain high-frequency indicators, such as industrial production and exports of goods, in the first quarter, points to more dynamic economic activity in 2021. Projections of variables representing foreign demand, which we take from relevant external sources, were also revised upwards. It also influenced the assessment that economic activity in BH in 2021 will be stronger than expected at the end of 2020. The economic growth projection for 2022 has been revised upwards by 40 basis points, compared to the second round of projections from 2020.

Table 1: Projections of Key Macroeconomic Aggregates and Inflation

Source: CBBH. Projections of the Office of the Chief Economist from May 2021. In making the projections, the available official statistical data as of the fourth quarter of 2020 were used, as well as the available information and high-frequency data until April 2020.

With these revisions of the projected economic activity rates to higher levels, the level of real GDP from 2019 could almost be reached by the end of 2021. The growth of personal consumption in 2021 is based on positive indicators related to the labor market, the projected decline in the number of unemployed, a slight increase in employment and average net wages, and the growth of remittances from abroad. Compared to the previous round of projections, we slightly adjusted to higher level the recovery of personal consumption by the end of 2022, as we turned to be somewhat more pessimistic, compared to the actual situation in 2020, in terms of labor market flexibility and speed of recovery, especially the service sector. However, we are still quite conservative in terms of the unemployment rate trends, but also the speed with which the BH labour force could be employed in the EU in the short term, which affects personal consumption.

According to the first available data for 2021, the growth of exports of goods and a somewhat slower recovery of domestic demand (which slows down the growth of imports) will result in a less negative contribution of net exports to the GDP growth. With the growth of economic activity, in 2022, we expect a further deepening of the foreign trade deficit. The growth of revenues from tourism is projected in 2021, but we do not expect the trend to intensify before the second half of 2022.

In the previous round of projections, GDP growth in 2021 also relied on government spending growth. In this round of projections, we have revised downwards the positive impact that government spending will have on economic activity in 2021. The first quarter of the current year was marked by the tightening of measures that affect business operations, mainly from the service sector, which further affected fiscal revenues and extended subsidizing. In the medium and long term, the intensity of government spending could be further limited by the amount of public debt, but also by servicing of maturing public debt.

In the projection period, a slight increase in inflation is expected (Table 1). The growth of prices during 2021 will be influenced by the increase in transport prices, following the expected growth of energy prices on international markets. We expect the impact of domestic aggregate demand on consumer prices to strengthen in 2022. Inflation projections are consistent with the projected trend in economic activity. However, prices are, in the current circumstances, subject to stronger shocks, and the inflation projection in the coming periods could be significantly revised upwards. Factors that could cause an inflationary shock include continued growth in global freight prices, strong possible growth in metal prices, and strong changes in exchange rates relevant to international trade in goods.

Our projections so far have proved to be very objective, even in extraordinary circumstances such as a pandemic, so the deviation in the projection of real GDP for 2020 was only 20 basis points above the preliminary official data. However, we are not in the 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, i.e. success in combating the spread of the virus and the simultaneous gradual reactivation of economic activities.

Our assessment of possible deviations from the current projection of economic activity remains balanced. Among the factors that could contribute to the revision of the projection of economic activity to higher values in the second round of projections in 2021, we single out the expected significantly higher vaccination coverage of the population by the end of the current year, strong growth of industrial production and recovery of services related to 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 pandemics and limiting population movements. In addition, narrowing fiscal space could negatively affect public investment, and extending the period of weak economic activity would slow down banks' lending activity.

The publication of the next round of medium-term macroeconomic projections of the CBBH for the period 2021-2023 is planned for November 2021. In this spring round of medium-term macroeconomic projections, the projection horizon has been shortened by one year, as official projections of exogenous variables representing foreign demand are not yet available.