Vulnerabilities Slow Growth
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GDP growth in the Western Balkans slowed from 3.1 percent in 2016 to an estimated 2.4 percent in 2017.Regional growth in 2017 is less optimistic than the 2.6 percent expected when the Fall issue of this report was published. It slowed in Serbia due to a harsh winter and stalled in FYR Macedonia, where the political crisis deterred both public and private investment. Bosnia and Herzegovina (BiH) grew at a rate similar to the last two years. The dynamism of the smaller economies of Albania, Kosovo, and Montenegro drove regional growth in 2017, with support from higher growth in trading partners, a pickup in commodity prices, and the execution of large investment projects.
Although job growth was slower than in 2016, in the first nine months of 2017 190,000 new jobs were created in the region. Labor force participation increased in most countries, as more people entered the labor market and found jobs. Over 80 percent of new jobs were in services, mostly retail and wholesale trade, supported by growth in consumption. Although unemployment fell in most countries, it still ranges from 13.5 percent in Serbia to 30.4 percent in Kosovo. Poverty continued to fall despite rising food and energy prices.
Even though revenues improved, not all countries took the opportunity to reduce fiscal deficits. Serbia and Bosnia and Herzegovina recorded surpluses in 2017, but in the rest of the region, deficits continued, driven by the high amount of recurrent spending, often on poorly targeted social benefits and subsidies. Albania, Montenegro, and Kosovo are now working to revive growth-enhancing capital investment. Careful financial, public investment, and budgetary management will help ensure that fiscal risks associated with investments are minimized, which should relieve pressures on medium-term debt sustainability.
External vulnerabilities intensified in some countries. Current account deficits widened in several countries despite growth in exports because, except in Kosovo and FYR Macedonia, imports overwhelmed exports. A particularly cold winter necessitated more energy imports, and large infrastructure projects and higher consumption demanded more machinery, equipment, and goods from abroad. A current account sustainability analysis suggests that Western Balkan countries need to reduce external deficits in the medium term.
Bold structural reforms are necessary if the region is to grow sustainably over the medium term. Regional GDP growth is projected to rise from 2.4 percent in 2017 to 3.2 percent in 2018 and 3.5 percent in 2019. Countries are expected to grow faster, pushed up by projected stronger growth in Europe, except for Albania, where moderation is expected as large investment projects are completed, and Montenegro, which is expected to undergo a much-needed fiscal consolidation. Among risks to the outlook are trade protectionism, normalization of interest rates globally, and low potential growth and uncertainty about domestic policy or policy reversals.
These risks can be mitigated by rationalizing spending to build fiscal space for growth-enhancing reforms, and by a more strategic approach to boost competitiveness. Policies to lift physical and human capital, expand labor force participation, and improve market institutions should help raise growth potential and reduce inequality.
