The country's actual GDP growth may slow down to 6.5% in FY23 from 7.2% in the previous fiscal, said Fitch Solutions, citing several decelerators.
Its forecast is considerably below official projections of 7.5%, as the economy is grappling with headwinds stemming from elevated inflation and energy prices, tightening monetary conditions, and a weakening global economic backdrop.
Fitch added that sustained easing of Covid-19 restrictions will remain supportive of growth and thus limit the extent of the economic slowdown.
"We see three major headwinds facing the Bangladeshi economy over the coming quarters," the US-based ratings agency said.
"First, we expect domestic demand to soften on the back of elevated inflation and weak remittance inflows."
The latest data showed consumer prices rising by 8.9% year on year as of October 2022.
The inflation eased from its peak of 9.5% but remains above Bangladesh Bank's (BB) target of 5.6%.
Second-round effects from the surge in energy and commodity prices will continue feeding into the economy, leading to further inflationary pressures.
Furthermore, a recent 20% hike in bulk electricity prices in September will likely be passed on to consumers, contributing to broader price pressures, according to Fitch Solutions.
"Given Bangladesh's relatively low levels of per-capita incomes, elevated energy prices will have an outsized impact on household purchasing power and weigh heavily on private consumption."
Additionally, signs of a slowdown in remittance inflows have also become apparent, with the latest data showing a contraction of 10.8% year-on-year (YoY).
Given that remittances account for a large share of the economy, 6% of GDP, a sharp decline could point to early signs of a looming economic slowdown.
This can be partially attributed to inflationary conditions elsewhere as well as slowing global growth.
"Taking these factors into consideration, we forecast household consumption growth to slow to 4.9% in FY23 from 8.8% in FY22."
Second, above-target inflation, tightening global monetary conditions, and a deteriorating external position will prompt the central bank to persist in its hiking cycle.
"Since the start of its hiking cycle in May, the BB has hiked interest rates by a cumulative 100bps to 5.75%. We expect the policy rate to rise by an additional 50bps over the coming months, bringing the terminal rate to 6.25% in FY23."
It noted that higher interest rates will feed through into the economy, weighing on domestic and foreign investment.
"This is the main reason we forecast investment growth to dip to 8% YoY in FY23 from 10% in FY22."
Finally, a global economic slowdown will dampen demand for Bangladesh's exports.
"We think that the US and Eurozone will likely fall into a recession next year. If we are right, trading activity in Bangladesh would decelerate sharply, especially given that they represent more than half of Bangladesh's total exports," the Fitch forecast added.
