Economic growth in the Western Balkans is projected to gradually accelerate over the next two years and recover more robustly by 2027, supported by stronger exports and investment as global uncertainty eases, the World Bank said in a report in the region. 

However, the region must focus on creating “quality jobs” to sustain its progress toward convergence with the European Union, the bank warned.

In its latest Western Balkans Regular Economic Report, the World Bank forecast combined economic growth of 3.0% in 2025, 3.1% in 2026, and 3.6% in 2027 for Albania, Bosnia & Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia. The 2025 projection is 0.2 percentage points (pp) below previous estimates, reflecting a slowdown driven by inflation and weaker trade and investment.

“The Western Balkans are making progress in narrowing the development gap with more advanced European Union economies, but growth remains insufficient to meet people’s aspirations,” said Xiaoqing Yu, the World Bank’s division director for the Western Balkans. “To help the region become a modern economy, it is important to rethink jobs strategies — such as encouraging greater labor market participation, improving skills of the population, and boosting firms through digital upgrades.”

Slower growth in 2025

The report said economic activity in 2025 was being dampened by inflation that has “dampened consumption and heightened uncertainty constrained trade and investment, despite robust wage and credit growth”.

Regional growth of 3.0% in 2025 will still exceed that of the European Union, supporting “continued, albeit gradual, convergence with living standards in advanced economies”.  But the World Bank warned that “most WB6 countries will likely achieve high-income status by 2040 but none are expected to reach current EU GNI per capita levels within the next 40 years”. 

The slowdown is most pronounced in Serbia, the region’s largest economy, where growth is forecast to ease by 1.1 pp to 2.8% in 2025. North Macedonia and Montenegro are expected to see modest improvements, with growth of 3.1% and 3.3%, respectively.

Consumption will remain the main driver of growth, adding 2.8 pp to output, but this is lower than in 2024 as inflation erodes purchasing power. “A resurgence in inflation is expected to dampen household purchasing power, despite continued increases in wages and social benefits and modest gains in employment,” the report said.

Inflation rose across the region in 2025, driven by food and utility price increases, with headline inflation climbing from 3.7% in January to 4.5% in July, according to the World Bank. “Despite easing global food and energy prices, inflationary pressures in the WB6 in 2025 remained elevated due to local shocks (including droughts and other adverse weather conditions) that amplified their impact,” it said.

Demographic pressures

The World Bank warned that the Western Balkans face a “labour market paradox: labour shortages persist in certain sectors alongside high unemployment rates — above 10% — and low labour force participation, which remains below 55%, particularly among women, youth, and older adults.”

Demographic pressures are expected to worsen these trends. “The working-age population has already declined significantly and is projected to shrink by nearly 20% by 2050,” the report said. “If current population, growth, and labor market trends continue, the region could face a shortfall of more than 190,000 workers over the next five years.”

Employment growth slowed sharply in 2025, to just 0.1% in the first half of the year, compared to 2.0% in the same period of 2024. The regional employment rate averaged 48.6%, the report said, with Albania posting the highest rate at 58.3%, and Kosovo the lowest at 39.2%.

Deficits widen

Fiscal policy across the region “remained disciplined”, with deficits below 3% of GDP and public debt continuing on a downward trajectory. The regional fiscal deficit is projected to widen by 0.4 pp in 2025 but remain low overall, averaging under 3% of GDP.

Total public and publicly guaranteed debt is expected to decline slightly to 44.4% of GDP by the end of 2025, from 45.0% in 2024. Bosnia accounted for most of the improvement, said the report, with a projected decline of 1.5 pp of GDP. 

However, the report cautioned that “fiscal deficits in the WB6 are projected to widen in 2025, as slowing growth weighs on revenues while spending pressures continue to mount.”

The World Bank said the current account deficit (CAD) for the region is expected to widen to 7.1% of GDP in 2025, amid weaker exports and softer remittance inflows. “A smaller share of it will be financed by FDI,” the report noted.

After a strong 2024, “net FDI inflows to the WB6 have softened amid high uncertainty and weaker investor sentiment across Europe, especially in Germany and Italy”.  They are expected to average 4.7% of GDP in 2025, covering only 70% of the CAD, “a level which has not been seen since the pandemic”. 

Looking ahead, the World Bank projects a modest recovery in 2026-27. “A modest Euro-area recovery should help to support improved regional growth by boosting investment and exports,” the report said.

Investment is expected to contribute 1.4 pp to growth in 2026, while net exports should improve gradually through 2027. By that year, GDP is forecast to reach 4.0% in Serbia, 3.9% in Kosovo, and 3.5% in Albania.

The World Bank expects inclusive growth to drive further poverty reduction, but warned that “persistent pockets of vulnerability require more carefully targeted interventions.” Poverty rates are projected to decline to 12.2% by 2027, but “progress is uneven and vulnerable groups — such as the unemployed, rural populations and those with low education — require targeted policies and support programs.”

Risks to the outlook are tilted to the downside the report cautioned, pointing to “continued unfavourable domestic political developments, sustained global trade and investment uncertainty, and tighter global financing conditions.” However, “swift implementation of EU-backed reforms could significantly lift growth”. 

Reform push 

The World Bank said the EU Growth Plan offers a “strategic path for the WB6 to overcome structural barriers and boost long-term growth through continued reform efforts”. 

Without deeper reforms, the report warned, “ the region risks remaining on a path of modest gains constrained by demographic pressures and stagnant productivity”. But decisive action on productivity, education, labor participation, and investment “could transform the long-term growth trajectory of the WB6 and bring EU living standards within closer reach by almost three decades.”

The bank estimated that “full implementation of reforms outlined in the RGF to close 70% of critical gaps in five key areas with the EU in 20 years could add as much as 3% to baseline annual GDP per capita growth in the WB6.”

Those areas include digital infrastructure, regulatory quality, government effectiveness, financial development, and female labor force participation. Reforms in “regulatory quality (1.13 pp), government effectiveness (0.95 pp), and digitalisation (0.63 pp) offer the largest growth gains,” the report said.