PMC Research published a report "Macro Overview". According to the document, in the first two quarters of 2024, the Georgian economy grew by 9.1%, exceeding the 8.0% growth recorded during the same period in 2023. From January to August 2024, the average real GDP growth was 9.6%, with the highest growth rates observed in July and August, at 13% and 12%, respectively.
In July, the National Bank of Georgia revised its annual GDP growth forecast for 2024, raising it from 5.6% to 6.8%. Strong domestic demand and low inflation are key factors behind the higher-than-expected growth rate.
Education and accommodation and food service activities were the fastest-growing sectors in the first 6M of 2024, achieving year-on-year (YoY) growth rates of 25.0% and 23.0%, respectively. The energy sector saw a 9.0% decline compared to the same period in the previous year. This drop can be attributed to reduced domestic production from thermal power plants, whose output decreased by 26.3% in the first 6M of 2024. Education and transportation and storage were the key contributors to growth in the first 6M of 2024, with contributions of 14.6% and 13.3%, respectively.
By the end of August 2024, the budget deficit had reached 539 million GEL. Historical trends suggest that the majority of the deficit typically accumulates in the second half of the year, indicating a likely further increase. According to the Ministry of Finance of Georgia, the deficit is projected to reach 2.2 billion GEL by the end of 2024, which is the 2.6% of projected nominal GDP.
As of the end of August 2024, government debt had increased by 3.4% compared to the end of 2023. The Ministry of Finance of Georgia projects that by year-end, government debt will rise further to 33.7 billion GEL, representing 38.4% of the forecasted nominal GDP.
In Q3 of 2024, Georgian businesses assess the business climate to be slightly less favorable than that of Q3 of 2023 (-4.0 points). During this period, both present business situation (-5.4 points) and business expectations (-2.9 points) deteriorated.
In 2024, Georgia's business climate experienced a notable decline in Q2, driven by political instability and widespread civil protests against the bill on Transparency of Foreign Influence. While business expectations improved in Q3, they remained below the pre-pandemic level, in contrast to optimistic expectations that businesses had in the beginning of 2024.
Despite a noticeable recovery compared to Q2, the Georgian Economic Climate in Q3 of 2024 did not return to Q1 levels. Specifically, the Georgian Economic Climate Index in Q3 2024 decreased by 32 points compared to Q1. Furthermore, during the same period, the assessment of the present economic situation and future expectations declined by 21 and 47 points, respectively.
The sharp decline in expectations in Q2 of 2024 reflects the pessimistic outlook of Georgian economists, driven by political instability and concerns over the anticipated negative impact of the bill on Transparency of Foreign Influence on the economy.
• Headline inflation remained below the target level during the first 9M of 2024, at 1.1%.
• Core inflation followed a decreasing trend after 2023, reaching average 1.7% for first three quarters of 2024.
• The low level of inflation resulted from a strict monetary policy combined with minimal external shocks.
• However, rising domestic demand and the impact of imported inflation, primarily driven by higher energy prices, are putting upward pressure on inflation.
Monthly year-over-year (YoY) inflation remained below the target level throughout the year. An upward trajectory was observed in the second quarter, culminating in a peak of 2.2% in June, after which inflation steadily declined, reaching 0.6% in September.
• The primary factor exerting downward pressure on inflation in the first quarter was the decline in prices for food and nonalcoholic beverages. However, this base effect dissipated in May, and inflation returned to positive territory.
• Deflation in the housing, water, electricity, gas, and other fuels sector was driven by a one-time reduction in electricity tariffs. This effect will persist until the end of the year and will phase out in January 2025.
• The largest contribution to inflation in the first 9M of 2024 came from transportation and communication industry.
• Since the beginning of 2024, the National Bank of Georgia (NBG) began accumulating reserves. However, due to exchange rate fluctuations caused by domestic instability at the end of Q1, the NBG had to sell some reserves to stabilize the currency.
• Due to the appreciation of the US dollar since the beginning of October, the National Bank of Georgia (NBG) had to intervene through open market operations, which resulted in a further reduction of foreign reserves.
• Due to improved macroeconomic conditions, including low inflation and minimal external shocks, in May 2024 the NBG lowered the monetary policy rate to 8%.
• To manage the impact of increasing domestic demand and rising imported inflation, the monetary policy rate is expected to remain at 8% until the end of the year, with no further reductions anticipated.
• In 6M 2024, interest rates on loans denominated in GEL decreased slightly to 14.6% following the decreased monetary policy rate, while interest rates on FX loans have remained stable.
• Due to monetary easing and overall positive economic indicators, significant expansion in private sector credit has occurred. In the first 8M of 2024, the average growth rate of private sector credit reached 18%.
• A high share of foreign currency-denominated loans and deposits is a common phenomenon in developing countries. However, under such circumstances, exchange rate
fluctuations create risks for financial stability. In an effort to reduce the share of foreign currency-denominated loans and deposits, the Government of Georgia has actively implemented dedollarization policies since 2017.
• Financial dollarization has significantly decreased in recent years. As of August 2024, the dollarization of loans and deposits reached 43.9% and 47.8%, respectively. Importantly, the gap between these parameters is low, minimizing currency mismatch risks and overall threats for financial stability.
• Financial dollarization is on the decline; however, the optimal level for the economy has yet to be determined or established by the relevant authorities.
