Montenegro's GDP expanded by a real 3.4% y/y in April-June 2013, accelerating from a revised 1.1% real growth in the first quarter of the year, the statistics office said in a statement on September 25.

The office has cut significantly its first-quarter forecast from a previous 4.3% y/y expansion but did not give an explanation for the downgrade. It also revised down the economic performance in each of last year's four quarters, bringing the overall GDP contraction in 2012 to 2.5%. The office did not give a previous estimate of last year's growth but according to earlier data of the finance ministry, the 2012 GDP shrank by a considerably milder 0.5%.

The statistics office also did not provide sector or expenditure break-down for the Q2 2013 GDP. However, the positive performance is most likely underpinned by the good tourism season and the record high electricity output and exports (due to good weather conditions).

According to the more detailed data for full 2012, the negative outcome was mainly due to falling manufacturing (down 12.9%), mining and quarrying (down 7.7%), agriculture (down 10.5%), construction (down 11.9%) and transport sectors (down 4.1%). The Montenegrin economy was up 3.2% in 2011, the office confirmed its previous data.

The government recently revised upwards its 2013 growth forecast to 2.7% from a previous 2.5%, considering the positive performance in the first two quarters of the year. The outlook overshoots the latest European Commission (1.8%), IMF (1.5%) and EBRD (1.0%) growth projections for 2013.

We expect the recent mild recovery of the credit activity, which has been evident since the beginning of 2013 following a steady downward trend in the preceding two years (latest available), to support Montenegro’s GDP expansion this year. Growth will likely moderate in the coming quarters but the better agricultural output and the good tourism season will support the 2013 performance. On the other hand, a weak metal sector production and budget austerity measures aimed to curb the rising fiscal gap, will remain a drag on the economic activity.

The budget gap reached EUR 115mn in January-August (3.26% of GDP), already exceeding the full-year target of EUR 95mn (2.73% of GDP), due the activation of EUR 103mn state guarantees on aluminium firm KAP’s loans in July.