Return of private consumption
Confirmation of strong growth momentum came at the end of August, as both the 1Q and 2Q GDP figures were revised upwards by the statistical office, setting the average real growth rate in 1H21 to 7.6% y/y. We have, upon the release of the flash GDP figure earlier this month, already upgraded our GDP forecast by 1pp to 7% y/y average growth for this year, as the momentum seems a tad stronger than expected earlier in the year. Structure-wise, we expect a similar pattern in 2H21.
Inflation pressures intensified in 2Q21, averaging 3.2% y/y in the period, boosted by supply-side pressures and the low base of oil prices from last year. The recovery of domestic demand has still not spilled over into inflation figures, as confirmed by stable core inflation prints of around 2% y/y. Inflation is likely to move above the middle of the target band until the end of 1Q22, after which we forecast a steady inflation pattern below, but close to 3%.
While numerous CEE central banks started to tighten their monetary stance in response to rising inflation, the NBS has kept the key rate unchanged at 1%, reflecting their view of the transitory nature of current inflation pressures, but also the still present pandemic threat to growth.
The consolidated budget gap in 7M21 stands at just 0.1% of GDP. Revenues are reflecting a decent recovery pace, rising 25.7% y/y in 7M21, with record-high VAT intake in the last couple of months, while the expenditure side managed to remain relatively flat y/y, as large CAPEX fell short of expectations. We expect the budget gap to land at around 6% of GDP, thus below the government’s target of 6.9% of GDP.
We expect a broad policy continuation from the NBS when it comes to steering FX developments. FX reserves rose by roughly EUR 1bn YTD (~30% of the GDP), so the NBS has plenty of ammunition to combat repeated appreciation pressures.