Georgian Economy - High growth, high inflation
Economic rebound strengthened further in August, contrary to expectations. Despite surge in virus cases and some mobility restrictions in Aug-21, growth came in at 10.3% y/y, after 9.9% y/y growth in July, from where expectations for more flatter growth was in place. Overall in 8M21, real GDP increased faster than expected by 12.0% y/y. The part of this growth is explained by last year’s low base (economy contracted by 5.6% y/y in 8M20), but economy also surpassed pre-pandemic level of 8M19 by 5.5%. Growth is broad-based in 2021, supported by fiscal spending, robust growth in exports and remittances, gradual recovery in tourism (revenues at 31.1% of 2019 level), as well as strong loan portfolio growth (expanding by 15.3% y/y excluding FX effect in August). As we noted in our previous report, monetary tightening has little or no impact on demand for lending in the current recovery cycle, as consumers increased spending after lockdowns and business sentiment also improved. Notably, 29.9% y/y growth in 2Q21 (for which sectoral growth figures are available), was supported not only by gradual return of tourists boosting hospitality sector, but larger contributions came from trade, manufacturing and transportation, fuelled by pent-up domestic demand, as well as strong foreign demand on Georgia’s exports. Generally, preliminary growth estimates are subject to revisions by statistical office (revised down in 2020 pandemic year), but this time 2nd estimate by Geostat remained unchanged for 1H21, and this along with growth estimate for Jul-Aug largely affect 2021 full year growth projection. Therefore, considering 8M21 actual growth figure, we now expect growth at 9.5% for the whole 2021 year (revised upwards from 8.6%), assuming recovery to flatten gradually in the coming months, while we keep our optimistic growth scenario at 11.2%. Risks to growth are weaker now as no strict lockdown is expected and there is low probability of possible post-election domestic political instability to weigh on growth (usually, the latter does not have effect on short-term growth in Georgia). We expect growth at 5.0% in 2022 (with more upside if tourism recovers faster than expected).