Ambitious investment plan supporting growth
Economic growth roughly halved in 2022, as negative spillovers from conflict in Ukraine weighed considerably on economy. High frequency indicators started to improve late in 1Q23, and together with ambitious investment plan should support growth over forecasted period. We have accordingly upgraded our expectations, now expecting average GDP growth of 2.4% y/y this year, before accelerating to 3% y/y in 2024.
Inflation peaked in October 2022 just shy of 20% y/y with food and energy prices accounting for more than 75% of total inflation on an annual level. Since then, inflation started to gradually decrease, coming down to 13% y/y in April 2023. Acknowledging the ongoing commodity price decline, the inflation rate is expected to average 9.1% y/y in 2023, before moderating to 3.5% y/y next year.
Monetary policy tightening started in April last year and continued throughout the year to keep inflation under control. The policy rate was increased by a total of 425bp since, standing at 5.5% in April 2023. Reserves recovered from earlier losses incurred at the start of the war in Ukraine.
The general government deficit reached 4.5% of GDP, down from 5.4% in 2021. This was below budget values, as the revenue side outperformed on inflation-driven VAT, while CAPEX once again fell short of the target. The targeted gap this year is 4.8% of GDP, reflecting spending needs related to the energy crisis and new highway construction.
North Macedonia is still in the process of important constitutional changes to include Bulgarians in the preamble as constitutive people and thus avoid repeated Bulgarian EU blockades.