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

The Central Bank of Bosnia and Herzegovina (CBBH) publishes the second round of projections of key macroeconomic variables for 2021 and 2022. Economic growth in the current year and in 2022 is estimated to be stronger compared to the projections from May 2021, which were prepared on the basis of the then available quarterly data from the end of 2020, and the available information until the end of April. According to the current projection (Table 1), the growth of economic activity in 2021 is expected to reach 5.8%, which is higher by 2.4 percentage points compared to the projection six months ago. The 2022 economic growth projection has been revised upwards by 50 basis points compared to the first round of projections from 2021, to the level of 3.9%.

Table 1: Projections of key macroeconomic aggregates and inflation

The source of the official data is BHAS. The source for the projections is the CBBH, Office of Chief Economist.
Notes: When preparing the second round of projections, the available official statistics was used as of the second quarter of 2021, and also the available information and high frequency data until October 2021. GDP components are real variables.

There are two basic reasons for such strong revision of the 2021 economic activity projection. Compared to the official available data from May, at the moment of preparing the second round of projections, the decline of economic activity in 2020 was revised downwards from -4.3%, to -3.2%. As the decline of economic activity in 2020 due to the pandemic, according to the official data, was weaker than initially estimated (by KM 1.03 billion), the growth in 2021, due to the base effect, was stronger. The base effect, due to the revision of 2020 data, was particularly considerable in case of investments. The CBBH balance of payments statistics suggests that the mentioned growth of real investment in 2020 was related to domestic investments and government sector investments. The remaining part of around KM 820 million for which the 2021 economic activity estimate was revised upwards, is a consequence of the continuing trend of strong recovery in some high frequency indicators, such as industrial production and exports of goods, during the entire 2021. Such recovery mainly resulted from stronger than expected foreign demand throughout 2021, reflected in significant upward revisions of economic activity in the EU. Finally, the growth of economic activity in 2021 was significantly influenced by a stronger than expected recovery of income from tourism.  

In addition to these upward revisions of projected rates of economic activity, the level of real GDP in BH from 2019 could be exceeded as early as in the end of 2021 by even KM 876 million (2.53%).The growth of personal spending in 2021 has been based on positive labour market indicators, and the projected decline of the number of the unemployed, a slow growth of employment and the average net wage, and the increase of remittances from foreign countries. Compared to the previous round of projections, the recovery of personal spending until the end of 2022 was revised upwards, mainly due to the significant revision of 2019 official data in the second half of 2021. According to the official data of BHAS, personal spending continued to increase strongly in the first half of 2021. The projection of growth of personal spending in 2022 was strongly influenced by the base effect, and expected trends related to labour market, lending and remittances from foreign countries. We remain quite conservative in respect of unemployment rate trends, but also the speed at which workers from BH could be employed in the EU in short term.

In 2022, we expect a moderate growth of real economic activity, due to the absence of base effect. The projection from May 2021, was revised upwards mainly due to the expected stronger investment activity, conditioned with high economic growth rate in 2021, but also the removal of obstacles for stronger arrival of foreign investors. The final appointment of the FBH Commission for Securities should be pointed out, which has created the basic conditions for a stronger activity of foreign investors. With the economic activity growth, we expect foreign trade deficit to deepen again in 2022. However, we expect this to take place slower compared to the pre-pandemic period, due to a slightly faster growth of exports compared to the growth of imports.and strengthening the single economic space.

Stronger inflation growth is expected in the projection period (Table 1). The inflationary shock, the possibility of which we pointed out in the first round of projections in 2021, has materialized. Although it seems that the projected inflation rate of 1.7% in 2021 is relatively low, given the strong growth of energy and food prices in international markets, but also the price of international transport of goods, it should be borne in mind that, in BH in the first half-year, the deflation continued. To a significant extent, due to these deflationary pressures in the first half of 2021, we expect inflationary pressures to strengthen in 2022. Inflation projections are consistent with the projected trend in economic activity, and prices from futures contracts for energy. However, despite the currently prevailing view that inflation shocks in Europe are transitory, there are still risks of stronger inflation shocks in BH, especially in the medium term. The risks are particularly related to the country's electricity prices, and the effects of the normalization of monetary policy of the European Central Bank (ECB).

Our projections so far have proven to be very consistent, even in extraordinary circumstances such as a pandemic. 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 developments epidemiologically wise, strong domestic and economic fluctuations, the 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, because it is illustrative that the annual growth rates of BH exports are extremely high marking the entire 2021. One can also show that we underestimated the recovery of personal consumption in the current year. We believe that the risks from the deviation of the current projection of economic activity in 2022 are balanced. Among the factors that could contribute to the revision upwards of the projection of economic activity in the first round of projections in 2022, we single out the expected significantly higher vaccination of the population, and the continuation of the trend of strong growth of industrial production and recovery of the service sector, linked to the arrival of foreign turists. On the other hand, a strong inflationary shock could delay the recovery of personal consumption, which would also be caused by a new wave of pandemics and by restrictions in population movements. In addition, narrowing the fiscal space could negatively affect public investment, and prolonging the period of weak economic activity would slow down the banks' lending activity. Stronger corrections of our projections could certainly be influenced by significant revisions in official data.

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