Economies in the Western Balkans have continued expanding by an estimated 2.6 percent in 2017. The region’s projected growth is less optimistic than the 3.2 percent expected when the Spring issue of this report was published and is also lower than the 2.9 percent achieved in 2016.
Albania, Kosovo, and Montenegro should grow faster in 2017 than in 2016, thanks to large projects financed by foreign direct investment (FDI) and a recovery in private consumption, as well as higher exports in the case of Kosovo.
Bosnia and Herzegovina is projected to grow steadily at a similar rate as in the last two years. In FYR Macedonia and Serbia, however, growth is expected to weaken. In FYR Macedonia, political turmoil significantly affected consumption and investment. In Serbia, the region’s largest economy, a cold winter significantly depressed agricultural output and construction activity.
More jobs, less poverty
Almost a decade after the global financial crisis, employment has recovered to pre-2008 levels in all Western Balkan countries except Bosnia and Herzegovina. About 230,000 jobs were created in the region in the 12 months ending in June 2017. More than half of these were in the private sector, mainly in services, both formal and informal.
Growth, jobs, and relatively low inflation helped to reduce poverty in the Western Balkans. The combination of economic growth and job creation contributed to a decline estimated at 1 percentage point in the region’s poverty rate, which is projected to be 23.6 percent for 2017. This implies that about 124,000 people in the region have been lifted out of poverty since 2016.
Positive medium-term outlook
The medium-term economic outlook for the Western Balkans is positive: Growth is projected to rise from 2.6 percent in 2017 to 3.3 percent in 2018 and 3.6 percent in 2019. Private consumption is likely to continue to drive growth, with support from investment and heightened exports. In particular, upgraded growth in the Euro Area would drive up demand for Western Balkan exports.
The risks to the outlook stem mostly from domestic sources, although there are also risks related to the global outlook. Domestically, the main risk is policy uncertainty or policy reversals that could affect investment and growth. But with risk comes opportunity: advancing structural reforms and the EU accession agenda will enhance the growth prospects of Western Balkan countries. Externally, stronger growth in the EU and still-favorable global liquidity conditions provide a tail wind for the Western Balkans. However, stronger EU growth is likely to be accompanied by an unwinding of the European Central Bank’s quantitative easing program, which will push up global interest rates and thus Western Balkan borrowing costs.
Sustaining the reform momentum is vital for improving living standards and creating opportunities for all residents of the Western Balkans. For countries undergoing fiscal consolidation, it is particularly important to sustain reform momentum. Albania, Bosnia and Herzegovina, Montenegro, and Serbia are improving their fiscal positions, thus reducing risks and improving medium-term growth prospects. And just as important as not overspending is spending better. To this end, all Western Balkans countries can improve the quality of their fiscal policy by reallocating spending from a multitude of untargeted social benefits to productivity-enhancing investment. This would support growth and, during difficult times, help safeguard gains already achieved.