South East Europe on Slow Road to Recovery, according to World Bank

December 9, 2013

TIRANA, December 9, 2013—The countries of the South East Europe (SEE6)[1] region exited from recession in the first half of 2013, led by improved export performance, according to the latest World Bank South East Europe Regular Economic Report (SEE RER).  The report was launched from Tirana across the region in a series of events chaired by World Bank Country Director for South East Europe Ellen Goldstein. 

Average growth of real income of the six countries rebounded from negative 0.7 percent in 2012 to 1.8 percent (year-on-year) in the first half of 2013, supported by nascent recovery in the Eurozone.  In addition, favorable weather conditions supported a strong contribution of agricultural output to economic growth and helped weaken inflationary pressures.

“Industry – especially manufacturing exports and energy – drove the recovery,” says Gallina Andronova Vincelette, Lead Economist and co-author of the SEE RER. “The region experienced a welcome surge in exports in 2013, particularly car exports from Serbia.”

The report notes on the downside that domestic demand remained depressed across the region, reflecting high unemployment, sluggish growth of household incomes and credit, and a difficult investment climate. Beyond these short-term factors, a slowdown in productivity growth and rising unit labor costs adversely affected economic growth, lowering competitiveness and demand for labor.

Abebe Adugna, Lead Economist and co-author of the SEE RER, explains:  “Unemployment in the region, at about 24 percent on average, began to decline in the first half of 2013 from its peak crisis levels.  But even where employment has recovered meaningfully since 2010, the gains were not broad-based and mostly concentrated in services. Industry continued to shed jobs in 2013 throughout the SEE6 region. Near-term economic growth will still not be strong enough to support substantial gains in employment in the short run.”

The report notes that as export performance strengthened and imports declined, current account balances narrowed.  The gradual recovery in the Euro Area helped the combined (weighted average) goods exports of SEE6 to grow by almost 13 percent (year-on-year), making a strong positive contribution to overall economic growth. Export growth picked up everywhere, especially in Serbia, propelled by new foreign direct investment based export capacity, but sustainability of such high export growth is uncertain in view of the region’s narrow export base and competitiveness issues.  And remittances continued to be resilient overall, but the Greek crisis began to take its toll, especially on Albania.

Foreign parent banks have reduced exposure to the region; this, combined with rising non-performing loans (NPLs) and weak credit growth, suggests the need for vigorous reforms to reduce NPLs and remaining vulnerabilities. In this environment, despite ample liquidity and relatively low policy rates, banks remained reluctant to extend new loans. As a result, credit growth slowed in most SEE6 countries.

With depressed demand, uncertain export prospects, and significant external risks, the short-term growth prospects for the six countries remain frail, according to the report.  Željko Bogetić, Lead Economist and also co-author of the report, elaborates: After the bounce-back of the regional economy in the first half of 2013, economic growth for the year is expected to be around 1.8 percent by the end of the year.  Bosnia and Herzegovina and Kosovo remain the slowest and the fastest growing SEE6 economies, respectively.

Overall, net exports will continue to drive growth in the SEE6 region in the short-term. However, the report explains that unfavorable labor market conditions, poor investment climate, and subdued consumption and investment will constrain economic activity.  The SEE6 region is projected to continue to grow at a rate of 1.8 in 2014, instead of the previously projected 2.7 percent, due to positive but restrained export growth in 2014.

Satu Kahkonen, Manager for macroeconomic and poverty reduction work in South East Europe emphasizes that The South East Europe countries need to continue to prioritize strengthening their domestic macroeconomic fundamentals and policies that boost their productivity and resilience to external turmoil. The nascent export-led growth of 2013 is a positive development, but sustaining it will be a challenge. In addition to the need to improve their fiscal positions, decrease public debts, and strengthen their banking systems, the SEE6 countries face significant structural challenges in improving productivity and competitiveness, including in the areas of the investment climate, the labor market, and the public sector.”   

The SEE RER is produced twice a year by staff economists at the World Bank’s Europe and Central Asia Region Poverty Reduction and Economic Management Department (ECA PREM).

[1] SEE6 are Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia.

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