Growth profile remains solid, biggest challenges come from political arena
Mid-term growth outlook is supported by stable private consumption profile and
expected acceleration of investment activity (both public and private). However,
high import dependency will keep growth rates at similar levels in upcoming
period. Fiscal figures should stay at acceptable levels, but upcoming general
elections bring some risks for fiscal responsibility.
Real Economy: GDP data, based on the production approach, shows that the economy expanded by a robust 3% y/y (vs. 3.1% y/y in 2016), despite political tensions and the deadlock regarding the disbursement of IMF funds, which are a key factor for the realization of big-ticket infrastructure projects. On the other hand, estimated GDP data based on the expenditure approach shows that the economy slowed down from 3.3% y/y in 2016 to 1.6% y/y in 2017, amid a slowdown of investments and a marginally negative contribution of net exports. Looking into the beginning of 2018, short-term indicators suggest solid dynamics on the domestic demand front. In the Jan-Mar18 period, retail sales increased by 5.7% y/y, industrial production by 6.9% y/y, while building permits increased by a relatively mild 0.7% y/y; non-residential permits, which can serve as a proxy for business investments, increased by a solid 8.1% y/y. As for the contribution of net external demand, in the same period, exports increased by a solid 12.1% y/y, while imports followed with an increase of 10.3% y/y. Given the strong import orientation of the BiH economy, we expect that, despite the solid export dynamics, the contribution of net exports in the first quarter of the year will be negative.
In 2017, inflation returned to positive territory, and we see average 2018 CPI figure around 1.5% y/y. After three years of deflation, in 2017, inflation moved to positive territory, with the average figure landing at 1.2% y/y. In the first four months of the year, inflation stood at 1.1% y/y, but we expect a gradual acceleration of the inflation figure down the road, supported by higher excises and stronger domestic demand. That said, we see average 2018 inflation at around 1.5% y/y.