Projections on the medium term economic activity and inflation

PDF - Projections on the medium term economic activity and inflation

Due to the floods, in the autumn round, the Central Bank of Bosnia and Herzegovina significantly revised projections on the medium term economic activity and inflation

Key notes:

• The CBBH estimates annual growth of real economic activity in 2024 at 2.4%, which is 0.2 percentage points lower than the April projection, based on expectations of a slowdown in economic activity in the last quarter following the impact of the floods. We expect the effects of the floods to influence the potential GDP, and that the consequences will exceed the current financial losses in the directly affected areas. The projections will certainly be subject to revisions as official high-frequency statistical data arrive, which for October are expected only from the second half of December. At the time of the projections preparation, we had available only estimates of current material and financial damage in the directly affected areas, as well as part of the structural business statistics for 2023.
• We expect moderate economic growth until the end of the projection horizon. The estimate of real GDP trends for 2025 is 2.6%, and 2.8% for 2026. Although personal consumption slows down significantly due to demographic changes, which significantly reduce the working-age population, and thus available income, it is the main driver of economic growth in the medium term. We expect that personal consumption will be additionally affected by the slowdown in economic activity due to the floods.
• In 2024, we project inflation of 1.8%, which is 0.8 percentage points lower compared to the round of medium-term projections from April 2024. The correction was made in part due to the officially published data until September 2024, which indicate price stagnation in the utilities costs section, despite increases in electricity prices, and an annual drop in prices in the transportation section. As a result of the floods, we expect an increase in transport prices, which will also affect the prices of food products.
• We expect the biggest contribution to price growth in the next two years from administrative costs, i.e., core inflation, primarily electricity and transportation prices. Further increases in the price of electricity and transportation may lead to chain increases in the price of services and consumer goods, which could lead to the upward revision of the inflation projections.