Bosnia and Herzegovina: Growth to remain subdued in 2024

Economic activity slowed to 1.6% y/y in 2023 as domestic drivers of growth softened, while external ones tumbled. High-frequency indicators, except for retail, indicate still subdued performance at the start of the year. Labor market tighten last year, but is showing signs of slowing early in 2024, while wage growth, although moderating a bit, remains well above historical trend. Inflation decelerated faster than elsewhere in the region and continues to hover around 2% y/y since the end of last year. Upcoming local elections in October might bring some spending pressures, but likely also another round of polarizing statements.

• Last year has seen modest growth of real economic activity as real GDP expanded 1.6% y/y. Slowdown in growth stems from a decline in foreign demand and the resulting significant decline of domestic exports, while on the other hand, investment and personal spending have had positive contributions to growth.

• This year we expect only a mild acceleration of activity. On the domestic side, we can still see strong retail activity maintaining double-digit growth rates, but industrial production remains in the red, with continuously weak manufacturing output. On the external side, export of goods remains deep in negative area (-8.2% y/y after 4M24), while imports accelerated (5.7% y/y after 4M24) creating a massive trade deficit. Bottom line, we have downgraded our FY24 GDP forecast by 0.4pp to 1.8% y/y. Growth expectations for 2025 have now been upgraded by 0.5pp to 3.1% y/y reflecting expected stronger recovery of external demand.

• Inflation decelerated from 14.7% y/y at the end of 2022 to just 2% y/y on average in 4M24, thus showing stronger deceleration pace than elsewhere in the region. Inflation in 2024 is expected to be 2.6% where core inflation and food prices will again have the largest contributions in the growth structure, followed by pressures from higher electricity prices. In line with projected acceleration of economic activity in 2025, inflation should rise to 3.2% y/y in 2025.

• In absolute terms, the C/A gap dropped 30.4% y/y in 2023 largely due to stagnating nominal trade gap. Relative to the GDP, C/A gap narrowed 1.6pp to 2.7% of the GDP. Adverse developments in foreign trade present in 2H23 continued, and even deepened in the first quarter of 2024 with declining exports and an increase of the value of imports. We expect the trade gap will widen by roughly 1.2pp of the GDP in 2024, which will push the C/A gap towards 3% of the GDP.

• According to data published in the Global Fiscal Framework from February 2024, general government revenues increased by 10.3% y/y in 2023, while expenditures rose 14% y/y thus leading to a general government gap of BAM 428mn or 0.8% of the GDP. According to the same document, the gap is expected to widen to BAM 900mn this year (1.7% of the GDP) before declining to just 0.2% of GDP in 2025.

• Despite Bosnia and Herzegovina’s progress towards European Union accession, Bosnian Serb authorities continue to ‘actively subvert’ the state, peace overseer Christian Schmidt said in his latest update to the UN secretary general. As we move closer to local elections scheduled for October we can expect a continuation of confrontations between the High Representative Schmidt and the leader of Republika Srpska, Milorad Dodik.

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