Growth slows in Western Balkans despite job creation

Growth slows in Western Balkans despite job creation
Regional economic growth slowed in 2017, a report from the World Bank shows.
By bne IntelliNews April 12, 2018

A harsh winter and a decline in investments slowed growth in the Western Balkans in 2017, even though 190,000 new jobs were created in the first nine months of the year, a World Bank report said. 

An official from the development bank stressed that growth is highly vulnerable to both domestic and external shocks, and structural reforms is needed to reduce this vulnerability and put growth on a more stable footing. 

This was illustrated in 2017, when the unusually cold winter across much of the region resulted in more energy imports, contributing to a downward revision of the 2017 growth estimate to 2.4% from 2.6% previously, the report  Vulnerabilities Slow Growth said. External vulnerabilities were increased by higher imports both of equipment for large infrastructure projects and for consumption. 

Growth was mixed across the region in 2017, with robust rates of between 3% and 4.4% in Albania, Bosnia & Herzegovina, Kosovo and Montenegro. By contrast, Serbia, whose large agriculture sector was hit by drought in the summer, saw an expansion of just 1.9%, and there was no growth at all in Macedonia, which only started emerging from a prolonged political crisis in the latter part of the year. This led to a steep decline in public and private investment. 

“Weather-related shocks, such as harsh winters and unexpected natural disasters, as well as country-specific vulnerabilities, such as political uncertainty, continue to threaten growth in the region,” said the report.

“Countries can combat the effects of these vulnerabilities by introducing reforms promoting private sector development and reducing barriers to labor force participation. Policies that increase both physical and human capital, boost employment, and improve market institutions can simultaneously elevate the growth potential of the countries in the region and reduce inequality.”

Better times ahead 

The picture for this year is fairly positive. Serbia is expected to return to a faster pace of growth of 3.0% this year and 3.5% (the regional average forecast) in 2019. The Macedonian economy is also expected to resume growth, expanding by 2.3%, followed by a 2.7% hike in 2019

Albania posted strong growth of 3.8% in 2017, which according to the projection is expected to slow down to 3.6% and 3.5% in 2018 and 2019 respectively, as two large foreign direct investment (FDI) energy projects wind down. Although Albania’s public debt declined in 2017, the pace of fiscal consolidation slowed. Continued efforts to consolidate public finances, improve the efficiency of spending, reduce debt and contingent liabilities, and introduce structural reforms in the energy, financial, and judiciary sectors are critical to foster confidence and drive sustainable growth, the development bank said. 

At 4.4% in 2017, Kosovo achieved the fastest growth among the six Western Balkans countries, driven mainly by investment and exports. GDP is seen to improve slightly to 4.8% in the next two years. The outlook projects average growth of 4.8% for 2018-2020, but major risks lie in political dynamics and incomplete execution of the investment programme.

Economic growth in Bosnia & Herzegovina is expected to accelerate to 4% by 2020, driven mainly by consumption and public investment. However, the World Bank pointed out that the country should remained focused on prudent, efficient, and effective fiscal policy that addresses persistent unemployment and continues to safeguard the banking sector. The country’s positive outlook is marred by challenging political environment that makes serious reforms difficult in infrastructure, telecommunications, energy sector, and transport.

Montenegro’s economy is pegged to expand by 2.5% in 2018-2020, driven by public investments and personal consumption. In 2018, fiscal consolidation is projected to lead to moderation of growth in the short term. However, after the completion of the first priority stretch of key Bar-Boljare motorway expected next year, growth could slow unless there are productivity gains and new private sector investments that would stimulate currently low potential growth.

Tackling unemployment

The report also highlights the decline in unemployment, one of the most serious economic and social problems faced by governments across the region. Linda Van Gelder, World Bank regional director for the Western Balkans, pointed out that, “more and more people are finding jobs and wages are slowly rising upwards.”

This is a breakthrough from a region that has some of Europe’s highest unemployment rates. The region’s average employment rate reached 42.6% in September 2017 after a steady period of increase — though Albania became the only country in the region where employment rose above 50% — while unemployment dropped by 5.6% y/y. It still remained significant, however, ranging from 13.5% in Serbia to as high as 30.4% in Kosovo. Youth unemployment stood at 31.5% in 2017, down from 37.5% the previous year.

“Employment − especially in wholesale and retail trade − is on the rise in the region, with all six countries adding jobs in 2017,” said the World Bank report, although it warned that the pace of job creation is now slowing. 

According to the research, services accounted for over 80% of new jobs in 2017, mainly in wholesale and retail trade, which was supported by growth in private consumption. The exception was Kosovo, where industry led, helped by demand for metals from the EU countries. Serbian industry was also boosted by demand for automotive products.

Even without economic growth, a public job creation  programme helped Macedonia’s employment rate to improve slightly, to 44.5%. Labour market performance improved as unemployment fell to a historic minimum of 22.4%. Although higher than in most Western Balkan countries, employment and labour force participation rates are low by EU standards.