WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

GDP growth exceeded expectations in Q1, reaching 2.1% year on year. However, it is uncertain whether the good news will continue: that growth was driven primarily by a decline in imports, which was a consequence of a significant drop in gross investment and which is unlikely to persist. Inflation has started to slow, following the government’s reinstatement of price caps on a number of staple foodstuffs, but it remains in double figures. Despite inflation cooling, the central bank has continued to hike its interest rate without offering any clear indication of whether the tightening cycle could end soon. Inflows of foreign direct investment (FDI) in Q1 were 7% lower than the year before (in nominal terms), suggesting that the previous year’s strong FDI performance may only have been temporary. However, remittances are growing robustly, with secondary income in the balance of payments rising by 45% in Q1 (nominally), potentially supplying a positive impetus to consumption, despite declining real wages. Given this mixed picture, our forecasts remain largely unchanged: we expect GDP to expand by 1.6% in 2023 and inflation to average 9%. We acknowledge, though, that the risks to the outlook for GDP growth are primarily on the upside. All is quiet on the EU front, as the constitutional changes required for accession talks to get under way seem as distant as ever.