Revision of macroeconomic forecasts - November 2017 - Dimitar Bogov Governor 2 November 2017
Contents : Change in risks between the two forecasts External assumptions Macroeconomic scenario for 2017-2019 2
Change in risks between the two forecasts Unfavorable risks estimated to be lower than in the April forecasts......particularly risks arising from the domestic environment whose effects are assessed to be completely exhausted in the period ahead......external risks associated with the global economy are balanced in the short term, but still assessed as unfavorable in the medium term - uncertainty associated with the new US policies, increased protectionism, worsened conditions in the global financial markets, effects of the Brexit, as well as geopolitical turbulences However, in this scenario, there are favorable risks that are mainly associated with the possible larger positive effects of the operations of the new export-oriented companies 3
Key assumptions underlying October forecasts Assumption about stable environment and exhausted effects of the domestic political crisis for 2018 and 2019 Maintaining the assessments of sound economic fundamentals of the domestic economy Fundamental factors similar to the April forecasts - gradual improvement of the external environment, further contribution of foreign export-oriented facilities, expectations for continuation and acceleration of public infrastructure investments and increase of foreign investments, increased confidence of domestic entities and acceleration of credit growth Assumption about gradual fiscal consolidation, same as in the April forecast, in line with the budget revision for 2017 and the fiscal strategy for 2017-2019 4
Downward correction of the foreign effective inflation for 2017 and 2018 to 1.8% and 1.4% (April forecast: 1.9% and 1.6%, respectively), and in 2019, expectations for accelerated price growth in our major trading partners and forecasts for foreign inflation of 1.7% Analyzing primary commodities, slower increase in oil price in 2017 and stabilization in the next two years, divergent movements in food and metal prices 3.0 2.0 Foreign effective inflation (annual rates in %) changes in p.p. (right axis) CF March 2017 CF September 2017 1.5 1.0 1.0 0.5 0.0-1.0 Q1 Q3 2014 Q1 Q3 2015 Q1 Q3 2016 Q1 Q3 2017 Q1 Q3 2018 Q1 Q3 2019 0.0-0.5-2.0-1.0 5
Upward revision of foreign demand for 2017 and 2018 - growth of 2.2% and 2.1%, respectively (April: 1.8% and 1.9%, respectively), mainly reflecting the expectations for faster growth of Germany For 2019, there are expectations for slight slowdown in the economic activity of our trading partners and forecasts for foreign demand growth of 1.8% 3.5 2.5 Foreign effective demand (annual changes in %) changes in p.p. (right axis) CF March 2017 CF September 2017 3.5 2.5 1.5 1.5 0.5 0.5 Q1-0.52014 Q3 Q1 2015 Q3 Q1 2016 Q3 Q1 2017 Q3 Q1 2018 Q3 Q1 2019 Q3-0.5 6
Macroeconomic scenario 2017-2019 GDP forecast Downward correction of the forecast for economic growth for 2017, and retained estimates for growth in 2018, same as in April After the modest movement of 0.5% in 2017, there are expectations for reversal to the previous growth path for 2018 and 2019, at expected rates of 3.2% and 3.5%, respectively In 2018-2019, the economic growth is expected to be export driven, with additional impetus from investment and private consumption 5.0 4.0 3.0 2.0 1.0 GDP (annual growth rates, in %) 2.5 3.2 3.2 3.5 18 15 12 9 6 3 0 Growth decomposition (contributions to annual growth rate, in p.p.) Private consumption Investment Government consumption Imports Exports GDP (in %) 0.0-1.0 0.5 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Apr.17 Oct.17-3 -6-9 -12 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 7
GDP forecast Fundamental growth factors same as before - exports as generator of growth, with additional impetus from private consumption and investment: Exhaustion of the adverse effects of the political crisis and GDP growth in the second half of 2017, driven particularly by the solid growth of exports and private consumption, amid gradual recovery of investment On average for the three years, exports are expected to be the generator, driven by the new production facilities, as well as recovery of some of the traditional sectors and continued growth of the global economy Positive contribution of the private consumption, given the favorable developments in the disposable income and solid credit support Growth stimulated by investment - following the decrease in 2017, assessments for their growth supported by public and foreign investment, as well as improved investment environment for domestic investors Regarding the growth structure, in the medium term, domestic demand is expected to continue to make the greatest contribution to the growth, with the exception of 2017, when growth will be driven primarily by net exports GDP Private consumption Gross capital formation Exports of goods and services Imports of goods and services Public consumption Domestic demand Net exports % % p.p. % p.p. % p.p. % p.p. % p.p. contrib. in p.p. 2017 0.5 2.9 1.9-5.4-1.7 8.1 4.4 5.4-4.0-0.6-0.1 0.1 0.4 2018 3.2 2.1 1.5 5.0 1.4 10.1 6.1 7.7-5.8 0.0 0.0 2.9 0.3 2019 3.5 2.5 1.7 6.4 1.7 6.5 4.1 5.0-4.0 0.0 0.0 3.5 0.0 8
Inflation forecast The current pace of inflation generally follows the April forecasts Unchanged expectations about the price movement compared to April - expectations for normalization of inflation from 1.3% in 2017 to around 2% in 2018 and 2019, amid mild positive output gap, upward movements of some import prices and higher foreign inflation Risks to the forecast inflation trajectory mainly attributed to the uncertainty about import prices 3 2 1 revisions (in p.p.) October 2017 April 2017 Inflation rate (in %) 0-1 -2 Q1 2014 Q3 Q1 2015 Q3 Q1 2016 Q3 Q1 2017 Q2 Q1 2018 Q2 Q1 2019 Q2 9
Moderate current account deficit in the period 2017-2019, averaging about 2% (somewhat lower than the April forecast) Reduction of the deficit in trade in goods and services, with assessments for further improvement of the performance of the new export facilities, recovery of some traditional export sectors and improved balance of trade in services (similar to April) Slight decrease in the secondary income and assessments for further widening of the primary income deficit (slightly lower than in April)
Inflows in the financial account in 2017-2018 averaged 2.1% of GDP (slightly lower than expected in April) and assessments for financial inflows of 2.9% of GDP in 2019 Main inflows in the financial account during the forecast horizon: net inflows of foreign direct investment and long-term public sector borrowing During the entire forecast horizon, foreign reserves adequacy indicators are maintained in a safe zone
Forecast of deposit and credit growth In 2017, amid weaker performances, deposit growth is estimated at 3.6% (4.2% in the April forecast), and with the further stabilization of the expectations and increased economic activity, the growth of deposits is expected to accelerate to around 6 % in 2018 and 2019 For 2017, according to the previous performances, the credit growth was slightly corrected downward to 4.6% (5.2% in the April forecasts), and in 2018 and 2019, credit growth is expected to accelerate to around 7% The banking system remains stable, liquid and highly capitalized 18 16 14 12 10 8 6 4 2 0 Credit and deposit growth 52 51 50 49 48 47 46 45 44 43 42 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total credit, y-o-y changes, in % Total deposits, y-o-y changes, in % Total credit share in GDP, in % (RHS) 12
Summary Risks to the latest macroeconomic scenario have been reduced compared to the April forecasts......whereas the October forecast incorporates expectations for stable domestic environment and exhaustion of the effects of previous adverse political developments These projections show the potential for solid economic growth, stable prices, moderate external position, solid deposit and credit growth in 2018-2019 With stable fundamentals, yet present risks at certain points, the NBRM did not make changes in the monetary policy in the third quarter The NBRM will continue to monitor the developments closely and if necessary, will make appropriate changes in the monetary policy 13
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Appendix 2: Comparison of GDP and inflation forecasts for Macedonia 15