The economies of the Western Balkan have shown “remarkable resilience” to the economic impact of Russia’s invasion of Ukraine, and have now surpassed pre-pandemic levels, according to the latest Western Balkans Regular Economic Report released by the World Bank.

Faced with higher energy and food prices, unfavourable weather conditions, tightening financial conditions and significant uncertainty, as outlined in the report, economies from the region nonetheless continued their growth in 2022. However, growth is anticipated to moderate to 2.6% for the region in 2023, and the outlook for the Western Balkans remains subdued. 

Looking forward, GDP growth is set to be driven by private consumption, exports and, for some countries, public investment. 

GDP growth forecasts for 2023 range from 2.3% in Serbia and 2.4% in North Macedonia to as high as 3.7% in Kosovo. 

During the following two years Kosovo’s growth will continue to outstrip the rest of the region at a forecast 4.4% in 2024 and 4.2% in 2025. 

“In the short term, growth outcomes are expected to be driven by economic performance in the EU, the course of energy and food prices, and the fight against inflation. All these factors are affected by Russia’s invasion of Ukraine and persistent impacts of the pandemic, which prompted shifts in demand and revealed supply bottlenecks. The outlook for the EU remains challenging, although the latest forecasts suggest that the Eurozone will avoid a recession,” notes the report. 

Inflation hits poor households hardest

Inflation surged to a two-decade high in 2022 in the Western Balkans, driven by energy and food price increases. 

The regional average inflation in 2022 was 11.8%. This is set to moderate to 7.0% in 2023, 3.4% in 2024 and 2.9% in 2025. 

Price pressures remain elevated in early 2023. While inflationary pressures are now easing due to slowing global growth, they remain entrenched, requiring further monetary policy tightening, the World Bank recommends. 

Higher prices have affected low-income households severely, which has resulted in a slower pace of poverty reduction despite government support programmes to mitigate the energy crisis.

“The poorest households spend a much higher proportion of their income on energy and food, the two items in the consumption basket with the highest price increase,” commented Sanja Madzarevic-Sujster, World Bank senior economist and a lead author of the report. 

“This means that the increases in the actual cost of living faced by poor people in the Western Balkans are much higher than official consumer price inflation figures suggest. To design effective policies to protect the less well-off and promote economic growth, it is important to consider the variability of inflation rates across different household types.”

Employment growth slowed across all the Western Balkan countries in the second half of 2022, with employment contracting the most in agriculture and public administration, while industry and services also observed a slowdown. In a region long plagued by high unemployment, the employment rate reached a historic high of 47% in September 2022, after which it began to decline.

Further reforms needed

The report highlights the need for the region to rebuild buffers to prepare for future shocks and undertake supply-side reforms to lay the foundations for more sustainable and greener growth.

“To continue weathering the storm presented by multiple economic shocks, countries can achieve high returns by pursuing reforms that boost productivity over the medium term, such as accelerating regional integration, increasing levels of market competition, attracting higher quality investments, and addressing barriers that limit labour force participation, especially among women,” said Xiaoqing Yu, World Bank country director for the Western Balkans.

According to the report, fiscal deficits have narrowed in most Western Balkan countries despite persistent pressure on governments to raise social spending to help populations cope with record inflation. Montenegro and Bosnia & Herzegovina are the exceptions, each seeing a deterioration in their fiscal balances compared to 2021, though less than previously expected, the report said. 

The regional current account deficit reached its second-highest level in the last decade in 2022, lower only than in the pandemic year 2022. The regional external deficit shot up to 6.9% of GDP in 2022 from 4.8% in 2021. This was mainly driven by the widening of external deficits in Montenegro and North Macedonia. 

Green transition to benefit Western Balkans

The report also highlights the need to accelerate the green transition across Europe, including in the Western Balkans. 

“A key starting point is to accelerate the move toward carbon pricing and to increase the use of environmental fiscal measures that incentivise households and firms to shift toward lower carbon intensity,” said Richard Record, World Bank lead economist, and a lead author of the report. 

The report suggests that one area of investment with the potential for significant economic returns for the Western Balkans is in energy efficiency, as even moderate improvements in firms’ energy efficiency would render substantial savings in energy-related greenhouse gas (GHG) emissions, improve firms’ profits, have large social benefits and help protect the region in case of future electricity and gas price shocks.