Bosnia a. H. Watch: Strong recovery in real sector continues in Q3

A strong impulse and correlation to overall economic momentum between the key categories of merchandise exports and industrial production continues in July in annual terms. Hence, exports of goods rose by 30.7% yoy in July, although at a slower pace than Q2 dynamics when low base-effect was the most pronounced as well as the global demand rebound. After extraordinary Q2 result, we expect slight deceleration in the second part of the year, especially in Q4 due to the start of the 4th wave of Covid-19 crisis so our target rate for year-end for merchandise goods dynamics is set between 13-14% yoy. However, at the same time, the other side of the trade balance, imports of goods also recorded double-digit growth in July, by 23.2% yoy, lifted by pent-up domestic consumption and revival of private investments. Consequently, the foreign trade balance came in negative territory in July (EUR -0.37 bn) bringing overall trade deficit in the period Jan-July 2021 at EUR -1.96 bn which is in line with our FY forecast of trade deficit (EUR -3.5 bn) being 3.6% higher than in previous year.

Similar to export of goods, industrial output also improved in July (by 10.5% yoy) at somewhat slower pace as compared to Q2, still headed by manufacturing (+13% yoy) and electricity production (+6.6%). Positive impulse also came from the weakest link of industrial output in 2021, Mining that recorded growth the second month in a row by 4.2% yoy (+8.4% in June), after 5 straight months of negative reading. The volume of output has been growing in the period Jan-July 2021 at a robust pace and quite broadly based at growth rate 12.8% yoy, but some slowdown is expected in the second part of the year as in the case of exports. Already in July, production volume eased on a mom basis, declining by 2.9% compared to June 2021, so we stick to our target of full year industrial production growth of 8% yoy in 2021.

After strong Q2 when retail sales turnover exceeded pre-pandemic volumes, with turnover further expanded in July recording growth on both monthly (+5.6% mom) and annual level (+28.4% yoy). All three retail sales index categories, recorded growth, namely food products, beverages and tobacco (+16.2% yoy), non-food products (33.4% yoy) and automotive sales (36.8% yoy). On monthly level, the largest gain was recorded by non-food category, with a growth of 7.9% mom, rebounding from a 2.6% decline in June. Overall, as of July retail sales growth has settled at 16.2% yoy.

The pent-up demand in private consumption that is fueling the retail sales is expected to be only partially pressured by the 4th wave of the pandemic at the end of Q3 and Q4, as consumers and the economy mostly have habituated to dynamics and effects of Covid-19 waves while larger lock-downs are not expected in Q4 2021. Hence, downsize risk of 4th wave and lower growth pace in Q3 and Q4 are incorporated in our forecasted retail sales FY forecast of 7% yoy in 2021.