DATACRUNCH: Three small Southeast European economies are outperforming Emerging Europe

DATACRUNCH: Three small Southeast European economies are outperforming Emerging Europe
/ bne IntelliNews
By bne IntelliNews November 14, 2022

The latest set of forecasts from the European Commission confirmed what other international financial institutions (IFIs) had recently predicted: three small Southeast European countries are set to outperform the rest of the Central, Southeast and Eastern Europe region this year. 

Croatia and Slovenia have shown themselves to be relatively resilient to the current crisis so far though slowdowns loom. Montenegro, meanwhile, is continuing its recovery from the coronacrisis after its tourism-dependent economy suffered the worst contraction across the Emerging Europe region in 2020. 

The European Commission autumn forecasts, released on November 11, project growth of 6.2% for Slovenia, 6.0% for Croatia and 7.0% for Montenegro this year, which were the highest for the eastern EU members and candidate countries included in the report. 

Earlier forecasts from September and October from the European Bank for Reconstruction and Development (EBRD), the International Monetary Fund (IMF) and World Bank also put the three countries ahead of the rest of Central, Southeast and Eastern Europe for 2022. 

In the broader Emerging Europe and Central Asia region, only some of the fast-growing Eurasian economies are set to see stronger growth rates this year. 

Moving into next year, however, Croatia and Slovenia are already experiencing a sharp slowdown and growth is anticipated to be just 1.0% in the former and 0.8% in the latter. Montenegro will fare somewhat better, along with the other Western Balkan economies, with growth projected at 2.9%.

Resilient to the energy crisis 

Croatia’s strong performance so far has been down to a combination of its relative resilience to the energy crisis, thanks to a large extent to its construction of the offshore floating liquefied natural gas (FLNG) terminal on the island of Krk, and partly to the continued post-Covid rebound of its tourism sector. 

“Croatia is relatively protected from the Russian gas import shutdown, given its majority state-owned energy sector, adequate share of renewables and access to alternatives through the Krk LNG terminal,” commented the EBRD. 

The FLNG terminal contributes to Croatia’s energy independence, and the country has ambitions to become an LNG hub for the region. Zagreb intends to double the capacity of the terminal from 2.9bn cubic metres to 6.1 bcm, Prime Minister Andrej Plenkovic said in June.

At the same time, both exports and private sector consumption are also going strong, driving growth in the country. 

The EC noted “strong, broad-based growth” on the back of a positive first half of the year. “Booming goods exports and a recovery of tourism and close contact services, together with employment growth, supported household consumption, while both public and private investment picked up,” said the report.

Other projections for the Croatian economy’s performance in 2022 range from 5.9% from the IMF to as high as 6.4% from the World Bank and 6.5% from the EBRD.

“GDP in Croatia continued to strongly expand in the first half of 2022 despite high and rising inflation and geopolitical tensions,” said the World Bank in its autumn 2022 Europe and Central Asia Economic Outlook. During this period, “Exports of goods and services maintained double-digit growth, and domestic demand remained robust.” 

The EBRD said that Croatia fully recovered from the pandemic already in 2021 when GDP expanded by 10.2%. That was due to a combination of private consumption, exports and investment. The strong growth continued into 2022, with GDP expanding by 7.4% year on year in H1.

The government has continued to support the economy, announcing a package worth 4.9% of GDP in September, under which electricity prices will be capped while vulnerable households will receive energy subsidies.

Solid foundations in Slovenia 

Slovenia’s growth is expected to come in a little behind Croatia’s this year. Both the EBRD and the IMF recently upgraded their forecasts for the country in 2022 following its stronger-than-expected performance in the first half of the year. 

In September, the EBRD upgraded its GDP growth projection by 2.5 pp to 6%, citing the positive impacts from both domestic and foreign demand in the second quarter. The following month the IMF also upgraded its forecast by 2 pp from its April projection. 

Rating agency Moody’s commented when affirming Slovenia's credit rating at A3 on “the [Slovenian] economy's resilience to shocks, solid medium-term prospects for growth and coping with the energy crisis from the perspective of public finances”. It also noted Slovenia's liquidity reserves, at 16.4% of the country’s GDP, are a “good support factor for public finances in these times of crisis”.

bne IntelliNews previously highlighted Slovenia as Emerging Europe’s ‘secret success story'; the country is richest of the post-socialist economies, and has overtaken two of the old EU members Portugal and Greece in per capita GDP terms. 

Slovenia had a strong starting point when it embarked on the transition. Since then, the small country’s post-independence history has been a series of firsts: it was the first Southeast European country to join the EU, the first emerging European country to join the eurozone and the first from the region to switch from borrower to donor status at the World Bank. It also outperforms the rest of the region, or at least is one of the leaders, on most human development indicators. 

Montenegro’s recovery continues

Montenegro’s story is different from those in Croatia or Slovenia as its growth was driven by the recovery in tourism, together with consumption the latter spurred on by a hike in the minimum wage. 

“Economic activity was driven by an increase in private consumption and exports, benefiting from a surge in real disposable income and the recovery in tourism, employment and remittances,” said the European Commission. These trends continued, albeit at a slower pace, into Q3

“In contrast, gross fixed capital formation recorded only marginal growth, while government consumption registered slight contraction over the year.”

“[E]conomic activity was driven by an increase in real disposable incomes owing to further recovery in tourism, employment growth, and household lending,” said the World Bank. 

"By June, the growth of exports outpaced that of imports, supported by further tourism recovery and higher metal and electricity prices.”

However, the World Bank added, the industrial sector fared less well, as unfavourable hydrological conditions caused domestic hydropower production to fall.

Slowdowns ahead

Despite their strong performance in 2022, both Croatia and Slovenia are already experiencing slowdowns, related to rising inflation (charts: Croatia, Slovenia) and slowing growth in their main trading partners. 


The European Commission forecasts a technical recession in Croatia in the last quarter of 2022 and the first quarter of 2023, resulting from a combination of “persistently high inflation, negative real wage growth and a decline in business and consumer confidence”. 

Other IFIs have also projected a sharp slowdown, with the World Bank noting that rising uncertainties in the external environment and inflation are weighing on real incomes and external demand.

Despite the positive growth, the World Bank warned: “Soaring food and energy prices hurt consumers, especially the poorest and most vulnerable … Worries about the economy, food prices, and energy prices are almost universal.”

Looking ahead, “The main challenges pertain to the implications of the war in Ukraine, particularly, gas imports from Russia, decline in real incomes as a result of rising inflation, monetary policy tightening, rising financing costs, and uncertainty. In addition, a slowdown in key trading partners like Germany could also have a negative impact on exports,” the World Bank said. 

“Risks are tilted to the downside due to high uncertainty, a slowing global economy and potentially costlier financing,” it added.

From a brighter perspective, Croatia is due to join the Eurozone at the beginning of 2023. Rating agency Fitch commented at the end of October when upgrading its 2022 GDP growth forecast from 3.3% to 6.1% that the upcoming euro adoption should help the Croatian economy remain resilient to external shocks, along with its improved fiscal and external positions. 

The country will also benefit from EU funding under the Recovery and Resilience Plan, which will require reforms that may boost investment longer term. This is important for Croatia, as the country faces issues of low productivity growth and lack of competitiveness, as well as its declining population that has squeezed the labour market. 

Growth tails off in Slovenia 

The slowdown has already started in Slovenia in Q3, as noted by the central bank, which said in October that quarterly GDP growth was moving to quarter-on-quarter stagnation in the third quarter. Assuming similar trends in the last quarter, means an annual growth of around 6%. After recovering from the coronacrisis, growth in Slovenia's industrial sector has fluctuated recently (chart). 


This came after the Slovenian economy expanded by a real 8.2% in the second quarter of 2022, following 9.8% growth in the previous quarter (chart). 

The European Commission anticipates “significantly lower” growth “due to a weaker external environment, high uncertainty and still high inflation”. This will lead to a temporary dip in private consumption, previously an important growth driver, as real incomes are eroded by inflation. 

On the other hand, public investment is set to remain strong, and the Commission expects exports to keep growing, even with weaker export demand than previously projected.

Private consumption already recorded a quarterly decline in Q2, as pointed out by the EBRD, which expects the drop in domestic demand and the weaker Eurozone economy to slow growth down to 1.8% (somewhat more optimistic than the European Commission’s projection).

Headwinds for Montenegro 

Montenegro’s economy “is expected to decelerate amid headwinds from high inflation, increased political uncertainty, as well as tighter financing conditions and weaker external demand,” the European Commission said. 

It also pointed to Montenegro’s weakening fiscal position, as new spending measures have been announced. This will lead to a 2022 budget deficit that is substantially higher than originally planned.

At the same time, Montenegro is suffering what some analysts have called its worst political crisis in 20 years. After the collapse of Dritan Abazovic’s short-lived government, a standoff between President Milo Djukanovic and the new majority in Parliament have prevented the formation of a new government. 

“The complexity of the political situation exacerbates already high uncertainties, and postpones the reform process, diverting the focus from imminent economic challenges,” commented the European Commission.

The World Bank warns that the unfavourable global economic outlook and high uncertainty are weighing on Montenegro’s recovery prospects, with growth expected to moderate over the next two years. “While still recovering from the pandemic, Montenegro is facing renewed headwinds,” it said. 

The bank does not expect Montenegro to start work on the remaining sections of the Bar-Boljare highway, the biggest investment project in the country, by 2025, as fiscal space is limited. It also notes that while tourism is expected to continue recovering next year, “deteriorating growth prospects in the EU and the region can slow its recovery”. 

The World Bank warns of multiple downside risks to the outlook, and says Montenegro will “require very careful debt management and stronger control over its expenditures”, given the tightening of global financial conditions and the country’s “sizeable financing needs of around 9% of GDP in 2023”.