Recent Economic Developments
The economy rebounded strongly from the COVID-19-related recession, with output expanding by 5.7 percent in 2021. Poorer workers, who saw sharper income impacts during the early stages of the pandemic that fed into rising inequality, saw a rebound in incomes.
A strong labor market supported wage growth, while high-capacity utilization and strong corporate balance sheets supported investments.
Inflation has accelerated markedly since mid-2021 to 8.5 percent in February 2022, well above the upper limit of the targeted range. Strong increases in energy and agricultural commodities, as well as continued disruptions in supply chains, fueled inflation.
High inflation triggered a faster than expected normalization in the monetary policy stance, and the Central Bank has raised its reference rate by 300 basis points since October 2021.
The unwinding of the large 2020 fiscal stimulus and the strong increase in tax revenues resulted in an improvement in the general government deficit to 3.5 percent of GDP in 2021 from 7.1 percent in 2020. The financial sector is well capitalized and has limited direct exposure to Russia, Ukraine, or Belarus.
Economic growth is expected to decelerate to 3.9 percent in 2022, as high inflation, monetary policy tightening, negative confidence due to the war in Ukraine, and slowing demand in key trading partners have an adverse effect.
The spillover from the war in Ukraine is expected to be significant, with key transmission channels that include forced displacement, commodity prices, trade, and confidence levels. Although direct economic linkages outside the energy sector are limited, higher energy and food prices, increased uncertainty, and disruptions in supplies to the auto industry will weigh on growth.
On the positive side, a large infrastructure and local public investment program, including through the National Recovery and Resilience Plan (NRRP), higher spending on health, and a boost to consumption related to the large influx of displaced people are expected to support growth.
Rising food and electricity prices are expected to weigh heavily on poorer segments of the population that devote 50 percent of their monthly spending to food and energy. Although measures under the so-called anti-inflation shield will soften the impact on households, the share of the population at risk of poverty is expected to remain elevated through 2022 and 2023.
The fiscal deficit is expected to remain above the medium-term budgetary objective.
Last Updated: Apr 18, 2022