2023 December-January Analysis Featured

PMC Research: Georgia’s economy outperforms expectations in 2023, outlook ‘uncertain’ for 2024

Despite expectations of a slowdown early in the year, Georgia outperformed expectations in the first nine months of 2023, registering annual GDP growth of 6.8%. But as 2023 draws to a close, PMC Research’s latest Macro Overview provides an economic snapshot of the year and where economists and businesses think the economy is headed in 2024.

Georgia’s economic climate in 2023

The Georgian economy continued to outperform expectations in 2023, shows PMC Research’s latest Macro Overview released in November. The report, which covers major macroeconomic trends from the first nine months of the year, notes that despite a slowdown from double-digit growth seen in 2021 and 2022, annual GDP growth came in at 6.8% at the end of the third quarter.

Source: PMC Research

PMC Research Analyst Shota Matcharashvili says this is the result of a slower-than-expected easing of one-off factors related to migration after Russia’s invasion of Ukraine in 2022. “Many expected that a significant portion of war-related migrants that came in early 2022 would leave by early 2023, causing a significant downturn in demand and money transfers into the country,” he tells Investor.ge. “However, this has been far more gradual than anticipated, which led to stronger performance in the first half of the year.”

Despite this, he notes, “we did start to see a slowdown in the second half of the year in many of these war-related factors like, for example, money transfers from Russia, which have been on a downward trend since April.” This combined with a global decrease in demand for copper and ferroalloys, which represent a top export for Georgia, and weaker performance in some key sectors, as well as concerns around a global economic downturn, do point to slowed growth in the last quarter of 2023.

Source: PMC Research

Business expectations and labor market

Georgian businesses assessed the first nine months of 2023 more favorably than in Q4 of 2019, PMC Research’s report shows. Surveys conducted through its BAG Business Climate Index indicate that business leaders reported increasingly positive assessments of the business situation in the country through the third quarter of this year, though future expectations did dip as some sectors, like construction, saw slight contractions.

Source: PMC Research

Labor market indicators continued to slowly improve in 2023, with the labor force up 2.8% YoY in the second quarter and unemployment coming in at 16.7%. The number of employees in the business sector reached a record high of more than 689,000 people in the first half of 2023, or 6.5% higher than the same period the year prior. Salaries were also up considerably, and 35% of companies surveyed through the BAG Index reported increasing their staff’s salaries in Q3.

Despite these positive labor market indicators, PMC Research’s Matcharashvili says that surveys of both economists and business leaders point to a glaring human capital concern in the country. “One of the reasons we’ve seen salaries increasing at the rate they have is the lack of skilled workers in the country, which is driving up competition between employers,” he explains. “In our latest economic climate survey, economists name emigration and a lack of skilled labor as top threats to the country’s economic sustainability. Our most recent BAG Index also saw businesses name a labor force shortage and a lack of specialists as the greatest hindrance to businesses’ operations.”

Source: PMC Research

Central bank policies

As the rest of the world continued to battle inflationary pressures in 2023, Georgia saw significant deceleration in inflation from 9.4% in January to .7% in September, though from a high base in 2022. This was, in part, due to the National Bank of Georgia’s continued tight monetary policy. The central bank started a gradual loosening of its policy rate from 11% in early 2023, coming down to 10% in October; and it’s largely expected to end the year at 9.5%. The central bank also continued to build its foreign currency reserves on the back of a strong lari, reaching a historic high of $5.4 billion in July.

Source: PMC Research

Despite these positive indicators, the central bank faced domestic and international backlash in the fall of 2023 as its response to international sanctions called its independence from political pressure into question. “This was a concerning blow to the reputation of the central bank,” says PMC Research’s Matcharashvili. “It’s essential for the financial stability of the country that the Georgian people and businesses, as well as the international community, have confidence in the independence of the NBG and the decisions it makes. This will certainly be an important issue to continue watching in the coming year.”

Trade and tourism

External trade turnover was up 16.5% in the first nine months of 2023 compared to the corresponding period of 2022, reaching a value of $15.9 billion. Trade turnover with the EU in that period registered a notable upward trend, growing 20% YoY, with what Matcharashvili describes as “an optimistic outlook.”

Trade with China, however, decreased by 10.5% due to a decline in demand for copper ores and ferro-alloys. A similar downturn in value was witnessed with Russia due to plummeting commodity prices. “Primary exporters of our copper ores and ferro-alloys were the U.S. and Russia,” says Matcharashvili. “Of these, 30% has been exported to Russia, but its value has now significantly lowered.”

Source: PMC Research

In addition to trade, Georgia reached its highest level of international visits in the post-pandemic period, reaching 81% of 2019 figures. Tourism revenue continued to hit record highs in the first nine months of the year, reaching $3.3 billion, a 29% increase compared to the same period last year and 25% higher than 2019 levels.

“We expect the number of Israeli tourists to decrease in the fourth quarter due to the war, however,” notes Matcharashvili, “and therefore total income from international travel to Georgia could be reduced as Israel represents one of Georgia’s main source markets.”

Source: PMC Research

Outlook for 2024

Looking into 2024, Matcharashvili says a less-than-optimistic global economic outlook will have a major impact on Georgia’s economic performance. “What we saw happening in the Georgian economy was quite different from the rest of the world over the last two years as the country benefited substantially from economic opportunities created by Russia’s war against Ukraine,” he says.

“As these factors wane, our expectations for Georgia’s economy are that it will align more with the rest of the world in the coming year; unfortunately, that outlook is rather uncertain and pessimistic.” The deepening real estate crisis in China, potential rising commodity prices due to renewed geopolitical tensions in the Middle East, and eroded fiscal buffers in many countries are causing concern globally. Expectations from the World Bank currently put global economic growth at 2.9% next year. While the IFI’s expectations for Georgia are at 4.8% growth in 2024, it is a far cry from the double-digit growth of recent years past.