Economic recovery continues in aspiring EU members

Economic recovery continues in aspiring EU members
By bne IntelliNews January 22, 2018

The economic recovery continued in the six Western Balkans countries — all of which are aspiring EU member states — in the third quarter of 2017 with annual GDP growth rising to around 2.5% across the region from 2.1% in the previous quarter, the European Commission said in its latest report.

The growth in Q3 in the Western Balkans was supported by private consumption and investments, while exports seem to have regained momentum, the EC said in its EU Candidate & Potential Candidate Countries’ Economic Quarterly (CCEQ) report.

GDP growth accelerated in some Western Balkans countries in Q3, like in Serbia where it speeded up to 2.1% y/y, driven by investment and household consumption.

In some countries it remained unchanged or decelerated in others. For example in Macedonia, the economy returned to a sluggish growth of 0.2% y/y in Q3 supported by household spending and exports, after contracting in Q2.

However, investments declined further in Macedonia which is still severely affected by the recent political turmoil.

In Kosovo, annual output GDP growth remained at 4.4%, due to the strong investments and a positive contribution of net exports.

In Bosnia & Herzegovina the growth was also unchanged at 2.9% y/y, mainly driven by private consumption and exports.

Conversely, annual GDP growth decelerated in Albania to 3.5% compared to the previous quarter, due to a sharp slowdown of gross fixed capital formation growth and a decline in exports of goods.

In Montenegro the growth fell to a still robust 4.7%, with growth driven by domestic demand components.

The report also covers Turkey, by far the region’s largest economy and a clear outlier in terms of the pace of growth as well. GDP shot up by 9.6% in Q3, accelerating from 6.4% in the previous three months, which the report said was “mainly driven by strong investment supported by the state-guaranteed corporate loan scheme as well as a strong recovery of household consumption”.

This is set to continue into 2018 and 2019 though at a slower pace; Turkey’s economy is forecast to grow by 4% this year and 4.1% in 2019, outstripping all the Western Balkans countries except Albania. 

Turkey has been an EU candidate country since 1999, but relations between Ankara and Brussels have deteriorated dramatically of late, and there no longer seems any realistic prospect of Turkey joining the union in the foreseeable future. The EU reportedly cut its pre-accession funding for Turkey in this year’s budget, citing concerns over human rights and Turkey’s divergence from democratic standards. 

However, there is better news for the Western Balkans countries, with the European Commission reportedly poised to release a new report setting out a 2025 deadline for the frontrunners Montenegro and Serbia to join. So far, only Serbia and Montenegro have managed to launch EU accession talks while others are in different stages of the EU integration processes.

Challenging labour market 

As well as assessing GDP growth, the report also looks at employment rates, noting that economic expansion led to further job creation, but at a slower pace. However, the jobless rate still remains high across the Western Balkans countries, and labour market situation is challenging.

Annual employment growth decelerated q/q in Albania to 1.3% from 3.5%, in Montenegro to 3.1% from 3.2%, in Serbia to 2.4% from 4.3% and in Macedonia to 2.1% from 2.7%.

Overall, the average annual job growth rate in the Western Balkans dropped to 2.5% from 4.3% in the second quarter.

Annual current account gaps narrowed further in almost all countries, but overall external positions in many cases remain vulnerable.

Low inflation remains a key characteristic of the Western Balkans economies, reflecting low commodity prices and exchange rate stability.

The economic growth is generating some upward pressure on prices, and consumer price inflation gained pace in some countries in the region.

In Montenegro and Macedonia, annual CPI inflation accelerated to 3% and 2.2% respectively, in November whereas in Bosnia & Herzegovina and Kosovo it decelerated to 1.2% and 0.8%, respectively.

In Albania, annual CPI inflation stood at 1.8% in December while in Serbia inflation reached 3%.

In the third quarter of 2017, bank lending continued to be supportive of growth in the Western Balkan region. Credit growth accelerated, compared to the previous quarter, in Bosnia and Herzegovina and Macedonia as well as in Serbia and Albania. On the other hand, credit growth decelerated in Montenegro and Kosovo.

As a common feature, household lending has been growing faster than corporate lending.

Credit extension is gradually becoming less constrained by the level of non-performing loans (NPLs), as most Western Balkan countries managed to further reduce bad loan ratios partly as a result of improved resolution frameworks and mandatory write-offs.

Albania recorded the highest NPL ratio in the region, 14.3% of total loans in November, even though it was down from 20.4% one year earlier.

In Serbia the NPL ratio reached its lowest value since January 2009 (12.2%), followed by Bosnia (10.8%) and Montenegro (7.4%).

Progress in fiscal consolidation seems to be slowing down in some Western Balkan countries, despite the fact that high public debt levels remain a source of vulnerability in several of them.

In Montenegro, the rise of expenditures was higher than revenues growth as capital spending surged as a result of strong base effects. The central government deficit amounted to 3.6% of full-year GDP in the first eleven months.

During the same period, in Albania, the rise of budget revenues was more than offset from the expenditure growth and the budget recorded a shortfall of 0.7% of GDP.

Conversely, in  Macedonia the central government fiscal deficit contracted by 3% y/y standing at 2.2% of full-year GDP, with both revenues and current expenditure going up moderately.

In Serbia, the fiscal situation continued to improve with the budget surplus standing at 2.1% of GDP as revenue growth outperformed expenditure increases.

Continued fiscal consolidation is necessary in a number of countries to rebuild fiscal buffers and reduce public debt levels which are especially high in Albania (69.7% of GDP), Serbia (62.6% of GDP), and Montenegro (61.7% of GDP), the report said.