Monthly Economic Review - June 2022

Growth:   The economic growth remains strong, while it softened to 7.2% y/y in June, after growing by 11.6% y/y in previous month. Cumulatively, in 1H22, the real growth was 10.5% y/y. Considering strong 1H growth and ongoing data, we revise the 2022 baseline growth forecast up to 9.2% from 7.6%. In this forecast, we assume growth to moderate in 4Q22 reflecting global slowdown. However, if external inflows remain strong despite global slowdown in 2H, in optimistic scenario we expect 2022 growth at 10.6%. Growth in June was recorded in hospitality sector, mining, transport and communications, while it reduced in manufacturing, construction and real estate. On expenditure side, strong remittances and tourism receipts continued to support consumption. 

Inflation: Headline CPI increased 12.8% y/y in June, moderating from May’s reading of 13.3%, mostly reflecting last year’s high base. Energy and food prices continued to be primary drivers, and the increased house rents limited deceleration, contributing 0.8ppts to the headline inflation. Going forward, we think inflation will moderate considering last year’s high base and seasonal easing in food prices locally as well as on global markets, however expect inflationary pressures to last longer (end-22 inflation expected  at 9.2%). 

Monetary policy: The NBG kept its key rate unchanged at 11.0% on June meeting. On upcoming 3 August meeting NBG will release updated macroeconomic forecasts. As incoming data show better-than-expected growth and increased inflationary risks, we do not rule out introduction of new measures from NBG to tame inflation.

FX: The GEL continued appreciation since May, gaining 10.3% vs dollar year-to-date, reflecting strong external inflows coupled with tight monetary policy and improved sentiments. We expect GEL to remain strong in 3Q22 amid hot tourism season and there is a likelihood of seasonal weakness in 4Q22.