CBBH estimates the strong growth of economic activity and extraordinary strong inflatory pressures

The Central Bank of Bosnia and Herzegovina (CBBH) estimates the annual growth of real economic activity at 8.7%. in the third quarter of 2021. The estimates were prepared on the basis of available official data for the first nine months, published by the beginning of December. Consequently, assuming the same volume of economic activity for the second quarter compared to the one published by the Statistics Agency in early October[1], we estimate the annual growth in real gross domestic product (GDP) for the first nine months of 8.1% (Graph 1 below). Based on the available monthly data for October, our nowcasts are that real GDP will record high annual growth rates in the fourth quarter, as well. In addition to the weakening of the base effect, due to increasing inflationary pressures in the country and with the major trading partners, but also as a result of new restrictions imposed in EU countries, due to the spread of new mutations in COVID-19 virus, we nowcast the growth to slow down in the fourth quarter compared to the second and third quarter.

Graph 1: Real GDP in the First Nine Months

Source: BHAS and CBBH (Estimates for 2021).

We estimate that real GDP growth compared to the first half of 2019 amounted to 4.4%. Only by comparing the estimated real economic activity in 2021 with the pre-pandemic year, one gets a sense of the depth of the contraction in 2020, which even the historically high estimated annual growth rates in the second and third quarters did not strongly neutralize. It should also be borne in mind that in 2019 there was a slowdown in the growth of economic activity in our main trading partners, as well as, a decline in the volume of domestic industrial production.

The recovery of the EU economy in the first three quarters of the current year had a positive effect on domestic economic activity. All monthly data, especially retail trade, industrial production, and exports, indicate that high growth in the domestic economy was recorded in the third quarter, as well. The nowcast is supported by high-frequency data, which indicate a significant recovery of service activities, especially those related to the tourism sector. However, if we take into account that there is no indication of a significant strengthening of private investment, relatively low lending activity, especially in the corporate sector, and the continuation of the growing trend of domestic deposits, we can nowcast the significant slow down of economic growth in the coming quarters, after a period of adjustment due to the base effect. A factor that could also significantly affect the CBBH nowcast of economic activity in the fourth quarter of 2021 is the possible significant revision of official statistics on economic activity for the previous quarters.

The prevailing negative risk for economic activity in immediate periods is now related to the increase of inflation, with the uncertainties related to the duration of the pandemic and epidemiological situation still being present.

According to the projection based on the official data available by the end of November 2021, the data on the expected trends of exogenous variables such as prices of food and oil, and domestic and foreign economic activities in the period ahead, inflationary pressures are expected to intensify in the fourth quarter. In the fourth quarter, the growth of average consumer prices at the annual level is estimated at 4.7%. Our current estimate of the average inflation in 2021 is 1.8% and it has been slightly modified upwards compared to the previous projection from the medium term model.

Although the 2021 inflation seems to be low, especially if focus is placed on annual changes per months, we should take into account that deflation was recorded in BH during the first half of the year, compared to the same period of 2020. Inflationary pressures in the second half of the year were so strong, that they not only neutralised the deflation from the first half of the year, but also resulted in a significant average growth of prices in the calendar year, which had not been recorded from 2012. Due to the expected base effect in the first half of 2022, and based on the currently available information on oil and food futures, we expect strong inflationary pressures in the first half of 2022 as well. According to preliminary and incomplete estimates, the annual inflation in the first half of 2022 could exceed 4%. Also, unlike announcements in the EU, maybe the inflation in BH cannot be estimated as transitional, due to a possible permanent increase of the level of average consumer prices due to the growth of energy prices in the country.

Nowcasting of key macroeconomic variables in the CBBH are used until the publication of official statistics, or a new round of nowcasting. The results of the next regular round of nowcasting of real GDP and inflation are scheduled for March 2022.

[1] NAC_02_2021_Q2_0_BS.pdf (bhas.gov.ba)