Last update (15/05/2023)
Economic expansion is expected to slow down in 2023 before picking up in 2024. Export growth is set to slow down in 2023, due to subdued foreign demand and country-specific one-off factors. Household consumption growth is forecast to decrease towards the end of 2023 and the first half of 2024, as real interest rates pick up and wage growth moderates. Inflation is set to decelerate, but to remain relatively high in 2023. The government deficit is forecast to increase in 2023 driven by social and income policies adopted in 2022. The 2023 budget discussion is ongoing.
|GDP growth (%, yoy)||3,4||1,5||2,4|
|Inflation (%, yoy)||13,0||9,4||4,2|
|General government balance (% of GDP)||-2,8||-4,8||-4,8|
|Gross public debt (% of GDP)||22,9||25,0||28,1|
|Current account balance (% of GDP)||-0,4||0,1||0,2|
Moderation of domestic and foreign demand ahead
Real GDP grew by 3.4% in 2022 on account of strong private consumption and exports. Real household consumption growth accelerated in the second half of 2022, supported by expansion in disposable income in the context of a very tight labour market. Export growth was particularly strong in the first half of 2022, reflecting both higher prices and volumes of exported commodities to the region, notably electricity. Imports also grew strongly, driven by high domestic demand and the high import content of exports. Early signs of cooling-off of the real estate sector were registered in the fourth quarter with a slump in building permits and new transactions.
GDP growth is forecast to slow down to 1.5% in 2023 and increase to 2.4% in 2024. Quarterly GDP is expected to stagnate after 2023-Q1 and then resume robust expansion in 2024, driven by export, private consumption and public investment. The growth rate of exports is set to decelerate markedly in 2023 and then rebound in 2024. Apart from the softening of external demand, export performance will be affected by the planned maintenances in the steel industry and in the nuclear power plant, as well as by the ban on the oil refinery’s exports of petroleum products processed from Russian crude oil.
Private consumption is expected to remain strong at the beginning of 2023, to soften until mid-2024 and to recover thereafter. Over the forecast horizon real household income growth is set to stay close to the positive 2022 levels, with wage and price inflation moderating broadly in parallel. Household saving rates are projected to increase with the rise in nominal and real interest rates, combined with some moderation in lending to households. Investment is expected to be supported by EU funds, including the ones under the Recovery and Resilience Plan (RRP), although delays point towards a rather backloaded implementation.
Risks to the forecast are broadly balanced. On the upside, the rapid expansion of nominal household income and consumption increase the risk of overheating. On the downside, a stronger fall in external demand, a more direct pass-through of higher interest rates to the domestic market and a deterioration in the housing market may depress economic activity.
Labour market remains tight with prospects for a gradual wage moderation
The labour market remains tight, with unemployment rate at 3.8% in February 2023. In 2022, nominal wages continued to increase strongly, reflecting both labour shortages and pressures from high inflation. In manufacturing, wage hikes were in line with strong productivity gains, while in construction and services they led to a rapid increase in unit labour costs. Wage growth is set to come down gradually, initially in the tradable sector, following the weaker export performance and the lower inflation rate. Wage moderation is then expected to spread to the rest of the economy. Employment is forecast to grow only marginally in 2023 and 2024 since the pool of unemployed has decreased substantially over the past years and the labour force has been shrinking overall.
Inflation to decelerate gradually
HICP inflation averaged 13% in 2022. Energy and food prices clearly drove inflation in the first half of the year and led to higher inflation in transport and catering services. In the second half of the year, consumer price inflation in services, also beyond those strongly influenced by food and energy prices, started to pick up, while food prices continued to increase, albeit at a lower monthly rate. Annual HICP inflation is set to come down from 13% in 2022 to 9.4% in 2023 and then decelerate further to 4.2% in 2024. Energy prices are expected to decline in both 2023 and 2024, while food price inflation is forecast to persist at high levels in 2023 and abate in 2024. Services price inflation is, however, projected to accelerate in 2023 and remain relatively high in 2024.
Government deficit is set to slowly decrease
Following a year of significant fiscal consolidation and a deficit of 2.8% of GDP in 2022, the 2023 deficit is projected to rise again to 4.8% of GDP in 2023. By the cut-off date of this forecast the government and the Parliament had not adopted any consolidation measures to finance the increases in wages and pensions that have a budgetary cost of around 3.5% of GDP in 2023. However, several factors should help contain the deficit. The net budgetary cost of the energy support measures is projected at 0.8% of GDP in 2023, compared with 1.5% in 2022. These measures are set to fully phase out in 2024. Transfers related to people fleeing Ukraine are also projected to have a significantly lower impact on the budget. The tax revenue is set to benefit from tax-rich income increases, but also from higher consumption and rising prices of goods and services subject to indirect taxes, mainly VAT. Deficit developments in 2023 are also affected by the assumed complete phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 1% of GDP in 2022. Public investment is expected to peak in 2023 on account of the completion of projects financed by the European Structural and Investment Funds (ESIF) 2014-2020.
The general government deficit is forecast to remain at 4.8% of GDP in 2024. Under the no-policy-change assumption, tax revenue increases are set to slow down. Current expenditure is forecast to grow faster than revenue, but the impact on the deficit will be offset by lower nationally financed public investment. The implementation of the RRP is set to pick up instead. General government debt is forecast to increase from 22.9% of GDP in 2022 to 28.1% by 2024. There is a positive risk that general government deficit and debt turn out lower than projected as the main parliamentary parties have committed to adopt consolidation measures to lower deficit in 2023.