New World Bank Report Foresees Fragile Recovery for Six Countries in South East Europe
June 18, 2013
PRISTINA, June 18, 2013—Signaling the end of the double-dip recession of 2012, the group of six South East European (SEE6) countries is now making a fragile recovery: its combined real GDP is projected to grow 1.7 percent in 2013 after a 0.6 percent decline in 2012, according to the latest World Bank South East Europe Regular Economic Report (SEE RER), presented today in Pristina. The drivers of recovery are the bounce back of electricity, agriculture, and some exports, partly because of improved weather conditions.
However, the recovery in SEE6 is still tentative. In some countries, non-performing loans, sluggish credit recovery, continued deleveraging, and fiscal consolidation are exerting a drag. Moreover, the recovery in SEE6 is unlikely to accelerate as long as the Eurozone remains in recession.
“Last year, the recession in the Eurozone had an adverse impact on external demand and foreign direct investment (FDI) in South East Europe,” says Abebe Adugna, Lead Economist in the World Bank’s Europe and Central Asia region and co-author of the SEE RER, “and the severe winter and a summer drought crippled agriculture and affected trade, energy, and economic activity overall. Now, output is beginning to bounce back. Exports are recovering in Serbia, the largest economy in the region; weather conditions are much improved; and the electricity, tourism, and related sectors are becoming more dynamic in some countries.”
One of the main worries in this nascent recovery, according to the SEE RER, is that SEE6 economies continue to be plagued by high unemployment. The average for the region was about 22.8 percent in the fourth quarter of 2012 compared to the pre-crisis 20.2 percent. Youth unemployment is particularly dire. Youth unemployment in Serbia (51.2 percent), FYR Macedonia (53.0 percent), and other countries is more than double the national unemployment rate. The countries are not creating jobs fast enough to absorb new entrants into the labor force. In fact, the jobs situation is worse than the dismal unemployment figures suggest because so many leave the region to work elsewhere.
“Creating more and better jobs calls for a multi-sectoral policy agenda, going beyond traditional labor market measures and regulations,” says Yvonne Tsikata, World Bank Director for Poverty Reduction and Economic Management, Europe and Central Asia Region. “In addition to preserving macro-economic stability and resuming economic growth, countries need to regain the pre-crisis momentum to undertake reforms and policies to improve the environment for new and existing firms to thrive and create jobs, and to support workers’ readiness to tap into the new job opportunities.”
According to the report, although global economic and financial conditions have continued to improve, the Eurozone is expected to remain in recession in 2013 (with real GDP expected to decline 0.6 percent). Global GDP is now projected to expand by 2.2 percent in 2013, 3.0 percent in 2014, and 3.3 percent in 2015.
Adugna adds, “Gross capital flows to low- and middle-income countries are 60 percent higher than what they were a year ago, pointing to an end to the most serious effects of Eurozone deleveraging on those countries, including the SEE6 economies. Even though recovery will, in general, be fragile, the economies in all six countries will be on the upswing.”
· Kosovo again is expected to have the highest growth (3.1 percent), thanks to major public investments and a significant inflow of remittances.
· Serbia will grow at a projected 2 percent, in part as a bounce-back from last year’s recession. Since Serbia accounts for 45 percent of the region’s economy, growth there is crucial to the region’s performance. Serbia is expected to benefit from increased FDI, solid performance from the large FIAT factory, and a return to normal agricultural output, which dropped nearly 20 percent in 2012. And as investors become more confident based on the possible opening of EU accession talks later in the year, more FDI can be expected.
· Albania is projected to grow at a rate slightly higher than in 2012 (about 1.8 percent), supported by a steady export performance.
· Modest growth is expected in Montenegro (1.2 percent), partly because electricity and agriculture are recovering, but mainly because tourism is surging ahead.
· FYR Macedonia’s economic growth (1.4 percent) is expected to be moderate initially but gradually speed up in the second half of the year with the implementation of public and foreign direct investment plans.
· In Bosnia and Herzegovina (BiH), growth is likely to be tepid this year – the projection is just 0.5 percent. Unfortunately, numerous issues related to the BiH business environment will continue to constrain FDI flows as well as the prospects for expansion of domestic businesses.
Zeljko Bogetic, Lead Economist in the World Bank’s Europe and Central Asia region and co-author of the SEE RER report, suggests that structural reforms are key to a more robust recovery and lower unemployment. “Fiscal consolidation efforts should continue and will become easier now that the output and revenue outlook is improving. The investment climate needs to improve substantially, especially in the main areas of weaknesses: construction permits and licenses, barriers to entrepreneurship and skills, and infrastructure. Its neighbors could learn from FYR Macedonia, which continues to have the most favorable investment climate in the region as measured by the Doing Business indicators.”
The SEE RER is produced twice a year by staff economists at the World Bank Europe and Central Asia Region Poverty Reduction and Economic Management Department (ECA PREM).
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 SEE6 are Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia.