SKOPJE, October 24, 2022 – Economic performance in all six economies of the Western Balkans continues to be impacted by the ongoing war in Ukraine and resultant sharp increase in energy prices and slowdown in global growth, says the latest Western Balkans Regular Economic Report (#22 in the series). These crises are creating significant headwinds for the region despite better-than-expected growth earlier this year.
In the first half of 2022, economic growth – driven by private consumption and investment – proved to be robust, exceeding expectations. Employment levels reached historical highs in several countries by mid-2022, and the region’s employment rate now averages 46 percent, a 3-percentage point increase over mid-2021.
However, growth momentum is now beginning to slow in the face of mounting challenges. Higher energy and food prices have pushed inflation to levels unseen for many years, eroding purchasing power and business confidence. The labor market is beginning to cool, with employment slowing amid the high inflation and increased uncertainty.
“While growth in the first half of 2022 proved to be relatively robust, it is clear that the region is now heading into another storm,” said Sanja Madzarevic-Sujster, World Bank Senior Economist and a lead author of the report. “A combination of shocks is weighing heavily on the region’s outlook. Tighter global financing conditions, a slowdown in both domestic and external demand, as well as weakening business and consumer confidence will certainly impact the region’s financial sector.”
Impacted by the war in Ukraine and the energy crisis, North Macedonia faces all-time high inflation, thus disproportionately eroding the real incomes of the poor. With limited fiscal space, elevated public debt, and increased cost of financing, fiscal support needs to target the most vulnerable households and firms. At the same time, monetary policy tightening needs to strike a balance between containing inflation and avoiding stifling economic activity.
“The Government’s policy support to the energy vulnerable is an important step in the right direction, but measures need to be targeted and timebound to minimize fiscal risks,” added Massimiliano Paolucci, World Bank Country Manager for North Macedonia and Kosovo. “At the same time, the focus should also continue to be on long-delayed structural reforms to boost growth and create new jobs.”
According to the report, such reforms would include measures to increase the level of market competition, remove entry barriers to business, increase retention and reinvestment among foreign investors, reduce barriers to female labor force participation, improve quality of education, and raise standards of governance, including digitalization.
The ongoing crisis also underpins the importance of accelerating the green transition in the region away from volatile hydrocarbons toward cleaner electricity generation, as well as greener production and consumption patterns, says the report.