According to the announcement from the press release related to nowcasting of economic activity in the fourth quarter of 2021 and inflation for the first half of 2022, the Central Bank of Bosnia and Herzegovina (the CBBH) announces revisions of the projections of key macroeconomic variables compared to the values from the autumn round of medium-term projections. In the period 2022 – 2024, we expect a slower economic activity and continued inflation pressures (Table 1). The projections for 2024 are the first ones published by the CBBH, while the values for 2022 and 2023 are revised projections compared to the previous, autumn round of projections.
Reasons for revisions of medium-term projections
Compared to the previous round of medium- term macroeconomic projections, the growth rate of real GDP has been revised downwards by 1,1 percentage points for 2022, and 61 basis points for 2023. Preliminary estimate of economic activity in 2024 is modest, having in mind the country’s level of development. Compared to the previous round of macroeconomic projections, the world is in a completely different macroeconomic environment. The prevailing perceptions from November were the following: the base effect of the strong growth following contractions due to the pandemic will be disappearing; inflation pressures are growing, but are probably, transitory, and disturbances in global chains of supply and production result in a stronger trade between the EU and the neighbouring regions including Western Balkans. The war in Ukraine has brought about negative changes in global markets of energy, food and production materials, with global distribution and production chains being additionally strained. Besides global price growth, signs of spiral nominal wages and prices appear in most countries, while the largest central banks in the world are already implementing or announcing a much more restrictive monetary policy, including the growth of benchmark interest rates.
Currently, in 2022, we expect inflation measured by consumer prices to be 7.7%. In the context of our earlier nowcasts of inflation for the first half of the year, we expect inflation pressures to weaken slowly in the second part of the year, mainly due to the base effect. The last week’s projections of the European Commission included the expected inflation of 6.8% in 2022 in the EU, a higher expected inflation rate in BH should be observed in the context of a lower inflation level in BH, compared to the EU in the previous years.
Due to inflationary pressures, we expect a significant slowdown in real individual consumption growth in 2022, and even a slight decline in 2023 and 2024. Individual consumption is the most important component of GDP (according to the spending principle) in BH. With the average net salary of registered employees in March, being KM 1092 (with more than 50% of employees in activities with below-average net salary), significantly lower average pensions, and unfavorable age structure and demographic trends, it is not realistic to expect real consumption growth in the inflation environment, especially since the growth of average consumer prices is not expected to stop any time soon.
Due to the disruption in global production and distribution chains, we expect that foreign trade with the EU and the countries of the region will continue to grow, although much slower than in 2021. Consequently, the projected real growth rates of exports and imports in 2022 have been adjusted to higher than for the autumn round of projections. Due to the base effect, but also the expected reduction in houshold available real income, we expect slower growth in both imports and exports in 2023.
The expected growth of investments in 2022 has been revised downwards, because until the preparation of these projections, the consolidated budget in BH has not been adopted yet, thus, it is impossible to start new public investments, even if there are sources of financing them. In addition, the private investment cycle has slowed, not only in BH, as due to price pressures, so as due to the uncertainties related to the war in Ukraine. We expect an increase in government spending, but when expressed in absolute terms, it is not particularly significant.
Risk for medium-term projections
Uncertainties regarding key assumptions regarding medium-term macroeconomic projections are significant. First of all, it is impossible to predict the duration of the war in Ukraine and its further course. Consequently, further turbulence in international energy and commodity markets is possible. In BH, there are additional risks that could accelerate the growth of domestic prices, which would further reduce the houshold available real income. Currently, the short-term effects of the normalization of the ECB’s monetary policy on the economies of the Eurozone, and indirectly the EU and the Western Balkans, can only be speculated, because current inflation has the characteristics of cost inflation. If the growth of the Eurozone economy slows down further, and it is expected to grow by only 2.7% in 2022 and 2.3% in 2023 (revised downwards in May, compared to February 2022, by 1, 3% and 0.5%, respectively), and the demand for domestic products and services would decrease, which would further slow down the economic activity in BH.
