Growth forecasts in Georgia are maintained for 2015 and 2016 to 2.0% and 2.5% respectively. However, but growth could be lower if recession in the Russian Federation proves worse than currently forecast, along with its impact on the country’s other trading partners in the subregion.
|Selected economic indicators (%)||2015||2016|
|ADO 2015||Update||ADO 2015||Update|
|Current Account Balance (share of GDP)||-12.0||-10.5||-10.5||-10.0|
Economic growth in Georgia slowed in the first quarter of 2015 to 3.2% from 4.8% for the whole of 2014. Preliminary data show a further slowdown to 2.6% in the first half of 2015. The slowdown largely reflects declines of 5.2% in manufacturing and 2.5% in trade, and it came despite strong growth of 22.9% in mining and 17.2% in construction. After expanding by 12.2% in the first quarter, bank credit fell by 1.5% in the second in line with slower growth.
Annual average inflation in August 2015 amounted to 3.2%, as large increases for tobacco and alcoholic beverages (13.1%) and furnishings, household equipment, and maintenance (9.3%) offset smaller declines for transport (–1.6%) and clothing and footwear (–0.9%). Continuing moderate inflation, despite depreciation of the Georgia lari by nearly 33% since November 2014, reflects weakening domestic demand (as much domestic credit is denominated in US dollars) and reduced profit margins for firms, along with lower prices for imported food and energy. Inflationary expectations have recently increased, however, with the depletion of inventories accumulated at cheaper prices, rising production costs, and extensive dollarization in the economy. To counter these expectations, the National Bank of Georgia raised its policy rate in steps by 200 basis points to reach 6.0% in August.
Though export data for the first 6 months suggest a further cut in exports of nearly 24%, reflecting a drop in vehicle exports by nearly two-thirds, lower oil prices helped cut imports by about 9%. Sharp declines in remittances—from the Russian Federation by 41%, Greece by 19%, and Italy by 12%—caused total remittances to fall by almost 23% in the first half of 2015.
Despite planned fiscal consolidation, capital spending is expected to contribute to growth in the second half of 2015 and in 2016. However, net exports will remain a drag on growth, as recession in the Russian Federation and Ukraine weakens the external outlook.
Inflation is expected to accelerate to about 6% by year-end. With tighter monetary policy, the Asian Development Outlook 2015 Update trims the inflation forecast for 2015 but keeps the forecast for 2016. The current account deficit reached 14.1% of Gross Domestic Product in the first quarter of 2015 as the trade deficit widened and the regional economic slowdown trimmed remittances. The deficit was funded largely through foreign direct investment inflows and official development assistance.
Because a rebound in exports and a further reduction in imports are expected in the second half, the forecasts for current account deficits are revised down for 2015 and 2016.
Excerpted from the Asian Development Outlook 2015 Update.