Issue 1, 2013. February-March



ISET Leading GDP Indicator for Georgia provides current-quarter and one-quarter-ahead GDP forecasts for those who need to make business and policy decisions and cannot wait until the official growth estimates are announced several months later.

Georgia's GDP growth forecasts continue to decrease

Based on data from November 2012, ISET PI has released its next forecasts for Georgia's real GDP growth rates. The forecast for the last quarter of 2012 dropped further down and the final number stands at 6.2% . This reduction was not, however, enough to change the annual forecast for the whole of 2012, which stays at the level of 7.2%. In the meantime, the forecast for the 1st quarter of 2013 has also been reduced and now stands at 6.2%.

Quickly summarizing last year (2012), we can say that it was a successful year for Georgia in terms of economic growth. The country exceeded the expectations (6.0% annual growth) of the World Bank by maintaining an annual growth rate at nearly the level (7.0%) of 2011. Even if the growth rate of the last quarter of 2012 turns out to be less than the forecasted 6.2%, the annual growth rate level of 2012 will still be close to 7.0%.

At the same time, Georgia bested its neighboring countries. If we look at the table, Georgia's growth rates clearly stand out.

2012 was election year in Georgia and the government changed as a result of those elections. Naturally, these political shocks influenced the performance of the Georgian economy. The pre-election period was characterized by oversized governmental expenses, mainly on road infrastructure, which resulted in large growth rates (varying around 20-25%) in the construction sector. However, there were also high growth rates in sectors like manufacture (around 20%) and financial activity (15%), which indicate sustainable growth.

The growth started relatively slowly in the 1st quarter (growth rate 6.7%) and rose to 8.2% in the 2nd quarter. It went down again in the 3rd quarter, which culminated in the pre-electoral campaign, to stand at 7.5%. However, economic activity also slowed down in the 3rd quarter in the countries neighboring Georgia: Russia's GDP grew only by 2.9% (y-on-y) in the 3rd quarter; the Turkish economy almost did not grow at all in that quarter (a growth rate of only 0.2%), and Ukraine even experienced a drop of 1.3%.

The 4th quarter of 2012 coincided with the post-electoral period and, given the change of government, political uncertainties stemming from the political transition influenced this period. Demand on money, the growth of VAT turnover, and external trade (both imports and exports) decreased during the quarter, which indicates a decline in economic activity. The new government started to decrease governmental expenses, which might slow down economic growth in the short-term. However, this decrease was largely caused by an optimization of governmental expenses and the reduction of "other expenses" by 50%. This will increase the country's fiscal transparency and is good for the future.

Our forecasting model is based on the Leading Economic Indicator (LEI) methodology developed by the New Economic School 2. We constructed a dynamic model of the Georgian economy which assumes that all economic variables, including the GDP itself, are driven by a small number of factors, that can be extracted from the data well before the GDP growth estimates are published. For each quarter, ISET-PI produces five consecutive monthly forecasts ("vintages"), which increase in precision as time goes on. Our first forecast (1st vintage) is available about five months before the end of the quarter in question. The last forecast (5th vintage) is published in the last month of the quarter.