Growth: Economy expanded by a robust 8.4% y/y in Jan-23, from last year’s high base of 18.0% y/y. If this positive momentum continues in the coming months, the likelihood of achieving our optimistic growth scenario of 6.9% for 2023 will increase (see here for more details). However, for now, we are maintaining our baseline growth forecast at 4.8% for 2023. In January, construction, financial, transportation and storage, trade, ICT and hospitality sectors drove the growth. Meanwhile, manufacturing, professional activities and energy sectors contracted.
Inflation: Headline CPI retreated to 9.4% y/y in January, marking the 4th consecutive monthly decline. Meanwhile core inflation rose to 7.7% from December’s reading of 6.8%, driven by an increase in housing rent prices. We expect disinflation to continue, supported by delayed GEL appreciation pass-through and the high base effect of last year. We expect average annual inflation at 5.2% in 2023 down from 11.9% in 2022 and see inflation close to the target by end-23, in our baseline scenario. However, in the case of our optimistic GDP growth scenario, we forecast average annual inflation to be at 6.0% in 2023.
Monetary policy: The NBG has kept its key rate unchanged at 11.0% since Mar-22. Given the uncertainty stemming from the current geopolitical situation and the upward risks to inflation, the NBG intends to delay monetary easing until inflation approaches the target. In our view, delaying monetary easing would be a more reasonable approach in case of stronger growth compared to the NBG’s 4.0% 2023 growth projection.
FX: The GEL strengthened by 2.8% vs dollar year-to-date, after gaining 12.5% in 2022. The continued robust growth of external inflows has been the key factor behind the currency’s strength. Notably, NBG purchased US$ 155.2mn in Jan-23. As external inflows continue to experience strong growth, we see average GEL rate at 2.65 vs dollar in 2023, an improvement from our previous forecast of 2.80.
