On the back of robust growth in the first half of 2022 and of a strong carry-over from 2021, growth is forecast to reach 6.2% in 2022 despite an assumed contraction at the end of the year. Growth in 2023 is expected to be significantly lower due to a weaker external environment, high uncertainty and still high inflation. The general government deficit is forecast to narrow to 3.6% in 2022, before increasing to 5.2% in 2023 due to planned investment and government support to mitigate the impact of high energy prices.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||8,2||6,2||0,8||1,7|
|Inflation (%, yoy)||2,0||9,2||6,5||3,5|
|General government balance (% of GDP)||-4,7||-3,6||-5,2||-2,7|
|Gross public debt (% of GDP)||74,5||69,9||69,6||68,8|
|Current account balance (% of GDP)||4,0||-0,6||-0,5||-0,3|
Strong growth in the first half of the year
GDP grew by 8.9% in the first half of 2022, compared to the same period one year earlier. While growth in the first quarter was broad-based, the composition of growth worsened in the second quarter. Consumption and investment contracted compared to the first quarter, while services exports remained strong and business continued to build-up inventories. Imports grew by less than exports, leading to a positive contribution of net exports to growth. Employment continued to expand at a brisk pace in the first half of the year and employment expectations continued to remain strong. On the other hand, confidence indicators have steadily declined since the start of Russia’s war of aggression against Ukraine. Industrial production in energy-intensive industries has already weakened pointing to a decline in economic activity in the end of the year. In 2022 as a whole, GDP is expected to grow by 6.2%.
Weaker growth over 2023 and 2024
Following two years of very strong growth, private consumption is projected to contract in 2023 due to the erosion of real incomes by inflation. Thereafter, with inflation expected to ease and employment set to expand, consumption is projected to resume a growth path. Price and demand pressures and increased uncertainty are expected to have strong negative effects on private investment. Public investment is forecast to remain strong due to the expected utilisation of significant residual structural funds and RRF-financed investments. Exports are set to continue growing over the forecast horizon, despite weaker export demand than previously projected. Lower consumption and investment are expected to weigh on imports and the current-account balance is set to slightly improve over the forecast horizon. GDP is projected to increase by 0.8% in 2023 and by 1.7% in 2024.
Labour market still strong
Low availability of workers is still the dominant factor on the labour market. Employment is expected to increase by 2.9% in 2022 and is forecast to continue expanding slowly in 2023 and 2024. The unemployment rate is projected to slightly increase from 4.1% in 2022 to 4.3% in 2023 and to decline back to 4.1% in 2024. Wages are expected to increase by a modest 2.2% in 2022 and to accelerate to 6.3% in 2023, broadly on a par with expected inflation.
Inflation has accelerated in 2022
Although softened by the cap of fuel prices and other measures implemented by the government, headline inflation accelerated from 6.3% in the first quarter to 11.3% in the third quarter while core inflation has reached 7.5% in the third quarter. Inflation is expected to remain high until the beginning of 2023, moderating thereafter with the softening of the economic activity. Inflation is projected to average 9.2% for 2022 and 6.5% in 2023, thereafter falling to 3.5% in 2024.
Discretionary measures shape public finances
The general government deficit for 2021 has been revised downwards from 5.2% to 4.7% of GDP, mainly due to higher corporate tax revenues.
In 2022, the deficit is projected to decline to 3.6% of GDP on the back of strong revenue growth from taxes on products, reflecting strong private consumption. On the expenditure side, the expiration of pandemic-related measures more than offsets new measures to mitigate the economic and social impact of high energy prices, which are estimated at 0.9% of GDP. They mainly consist of energy vouchers for natural persons, lower excise duty rates and financial compensation for farmers and companies.
The general government deficit is forecast to peak at 5.2% of GDP in 2023, driven by the government support to the corporate sector to mitigate the impact of high energy prices, amounting to an additional 1.5% of GDP. Current expenditure is forecast to increase by around 9% driven mainly by energy-related measures, compensation of employees and social benefits. Public investment is expected to peak as the previous EU multiannual financial framework draws to a close.
The forecast assumes a gradual consolidation of public finances as government support to mitigate the impact of high energy prices for the corporate sector is gradually phased out and growth picks up.
Projections for 2023 and 2024 are subject to upside country-specific risks including the announced revision of the public sector pay system and possible extraordinary increases of certain social benefits. The authorities have also announced a broad tax reform in 2023, whose parameters are unknown, except for an announced shift of tax burden from labour to capital. None of these possible increases in expenditure is incorporated in the forecast.
The debt-to-GDP ratio is projected to decrease from 74.5% in 2021 to 69.9% in 2022 and 68.8% in 2024 due to the changes in the headline deficit and the large denominator effect, including from the high GDP deflator.