Growth: The economy continued strong growth, with real GDP increasing by 7.0% in May 2023, following a 7.5% growth in previous month. Overall, in 5M23, growth came in at 7.5%. The expansion in May was primarily driven by construction, ICT, trade, financial, transportation and storage sectors, while the manufacturing and real estate sectors experienced contraction.
In light of the faster-than-expected reduction in the GDP deflator and upward revision of 1Q growth figure, we expect GDP growth at 6.8% in 2023, revised upwards from the previous projection of 5.8%.
Inflation: In May-23, headline CPI retreated to 1.5% from 2.7% inflation in previous month. This decline was primarily attributed to a reduction in inflation for imported goods (-6.5% y/y) and mixed goods (-4.2% y/y). Additionally, there was a slowdown in domestic inflation (+9.1% y/y in May vs. +10.6% y/y in April). We expect disinflation to continue and forecast average annual inflation at 3.1% for the entire year and end-2023 inflation at 1.0%.
Monetary policy: The NBG kept its key rate unchanged at 10.5% on 21 June 2023 meeting, after cutting it by 50bps in May-23. Based on communication from NBG, we expect further rate cut by 50bps on 2 August 2023 meeting. Considering disinflation trend, we see room for additional 100-150bps rate cut through end-2023.
FX: The GEL deprecated by 1.0% m/m in June vs dollar. Year-to-date GEL gained 3.1%. GEL’s weakness in June is likely attributed to one-off factors, as FX inflows remain robust and NBG purchased US$ 937.6mn in 5M23. We expect average GEL rate at 2.6 vs dollar in 2023.
