RECENT ECONOMIC DEVELOPMENTS
The economy grew by 2.7 percent in 2018. Supported by consumption and net exports, economic activity picked up in 2018 after stagnating in 2017. Private consumption was the main driver of growth, contributing 2.4 percentage points (pp) because of increases in employment, wages, and lending to households. Net exports, mainly related to foreign direct investment (FDI), contributed 1.7 pp. The remaining 0.8 pp. came from government consumption, as investments deducted from growth by 2.2 pp. On the production side, wholesale and retail trade and transportation services were the main drivers of growth, contributing 2.3 pp. The manufacturing contribution of 0.6 pp was driven by higher production, mainly of motor vehicles and electric machinery, by foreign-owned firms and by domestic producers of, for example, food and beverages, pharmaceuticals, and basic and fabricated metal products. Construction rebounded in October, adding 0.02 pp to growth, thanks to the launch of public investment projects and a continued recovery of private investment.
The labor market again improved in 2018. Employment grew by 2.5 percent year-on-year (y-o-y) in 2018. Most of the new jobs created were in manufacturing, transport and storage, and professional services. Even though the employment rate improved to 45.1 percent in 2018, more than half of the working-age population is still either unemployed or not looking for work. The unemployment rate fell to a historic low in 2018, averaging 20.7 percent throughout the year.
Wage pressures continue to be high in labor-intensive sectors. The higher mandatory minimum wage continued to put pressure on labor-intensive industries, which requested temporary government support to deal with the increased labor costs. Led by agriculture, manufacturing, trade, and the public sector, real wage growth was 4.4 percent in 2018—more than double the 2017 level. Low-wage labor-intensive sectors saw real wages grow by over 10 percent in 2018, far exceeding the growth in labor productivity over the past several years. Further mandated wage increases may erode the competitiveness of low value-added industries.
External imbalances improved in 2018. The current account deficit declined to 0.3 percent of GDP in 2018 compared to 1 percent in 2017. The continued solid export performance of FDI-related industries, such as motor vehicles and electrical machinery, was supplemented by the growth of exports in such traditional products as iron and steel and furniture. This helped to bring down the goods trade deficit to 16.2 percent of GDP. The surplus in net services exports remained solid at 3.3 percent of GDP, driven by transport and services for processing manufactured goods. Though net private transfer inflows continued to increase, they were more than sufficient to cover the entire goods and services deficit. Net FDI inflows picked up in the second half of the year, reaching 5.8 percent of GDP in 2018, due to significant investments coming from the United Kingdom. Gross external debt, excluding central bank transactions, increased in September to 77.6 percent of GDP (up 4.5 pp y-o-y), reflecting the January 2018 issuance of Eurobonds. More information can be found at the following link.
The economic outlook is positive, and growth is expected to gradually rise to 3.2 percent in 2020. The resolution of the name issue is expected to accelerate European Union (EU) accession negotiations, strengthening investor confidence and stimulating growth in the next few years. Large infrastructure projects, in particular roads, and the lifting of the moratorium on local governments’ ability to issue building permits will further boost investments. Consumption is expected to remain a stable source of growth, sustained by increases in employment, wages, and household lending. Net exports, especially those that are FDI-related, are expected to contribute positively to growth.
With the political outlook improved, emphasis should now turn to economic reforms. The main challenges to growth will be the low and declining productivity of local firms, weak state institutions, low human capital, a mismatch between skills and the evolving labor market demands of a modern economy, and policy barriers to competition and investment. A more competitive legal framework for businesses has yet to translate into a vibrant private sector that drives growth and jobs.
Last Updated: Apr 15, 2019