Economy losing pace
Economic growth slowed in 2Q as inflation and rising interest rates left a dent in household budgets, while investments and exports suffer from weak performance of key trading partners. High frequency indicators continue to signal weak output in 3Q.
Due to observed economic slowdown we have accordingly cut our FY23 and FY24 GDP forecast by 0.6pp and 0.4pp respectively to 1.8% y/y and 2.6% y/y. Growth is expected to moderately accelerate in the medium term led by the relatively high level of public investments (mostly road infrastructure), recovered personal consumption and stronger external demand.
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 6.6% y/y in September (9M23 average 11.7% y/y). Acknowledging overall easing of supply-side pressures, the inflation rate is expected to average 4.5% y/y in 2024, before falling to 3.3% y/y in 2025.
The general government deficit stands at 2.6% of GDP after 1H23, as expenditure side widened in 2Q following capex acceleration. The general budget gap this year is expected just under 5% of GDP, reflecting costs of highway construction, but also the new public sector collective agreement which burdens the budget by 0.7-0.8pp of GDP each year. Multi-elections next year could add to delays in stronger fiscal consolidation.
Prolonged parliamentary impasse due to lack of consensus for constitutional changes and upcoming multi-elections in 2024 shape an uncertain political landscape.