Western Balkans Regular Economic Report No. 26, Fall 2024: Retaining the Growth Momentum

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Table of Contents

• Retaining the Growth Momentum 13
• 1. Overview 14
• 2. Growth is accelerating supported by strong domestic demand 19
• 3. Solid growth is driving employment in 2024 27
• 4. Closing gender disparities can support stronger poverty reduction in the region 35
• 5. Maintaining fiscal prudence is needed to preserve past consolidation gains 39
• 6. Inflation is continuing to decelerate, but at a slower pace 47
• 7. Financial stability remains resilient amid uncertainty, helping to support credit growth 50
• 8. The external deficit has been widening amid continued external pressures 55
• 9. The growth outlook: diverging growth drivers 58
• 10. Spotlight: Reaping the Benefits of a Global Workforce 68
• Country Notes 92
• Albania 93
• Bosnia and Herzegovina 96
• Kosovo 99
• Montenegro 102
• North Macedonia 105
• Serbia 108
• Figure 2.1. 19
• GDP is accelerating amid a complex external environment 19
• Figure 2.2. 19
• Domestic demand is the main driver of economic growth 19
• Figure 2.3. 21
• Trade is expected to be a drag on growth in 2024 in all WB6 countries… 21
• Figure 2.4. 21
• …driven largely by a reduction in services 21
• Figure 2.5. 23
• ECA-HCI - Western Balkans, ECA and EU 23
• Figure 2.6. 24
• Higher education is underperforming in the WB6 and ECA 24
• Figure 3.1. 27
• Continued employment growth in 2024... 27
• Figure 3.2. 27
• ...has led to historically high employment rates 27
• Figure 3.3. 28
• Construction and services created new jobs 28
• Figure 3.4. 28
• More people joined the WB6 labor force 28
• Figure 3.5. 29
• Unemployment rates have declined further in the WB6 in 2024 29
• Figure 3.6. 30
• Unemployment rates still compare poorly with the EU27, especially for the youngest and prime age workforce 30
• Figure 3.7. 31
• The highest unemployment rates are found among younger women with only primary educational attainment 31
• Figure 3.8. 31
• Regional unemployment rate disparities persist at times of serious labor shortages 31
• Figure 3.9. 32
• Replacement rates are higher than in the EU27 32
• Figure 3.10. 33
• Real wage growth and unemployment in the Western Balkans (2017–2023) 33
• Figure 3.11. 34
• Average real wage and productivity growth, 2015–2023 34
• Figure 3.12. 34
• Labor shortages as business obstacles in the WB6 countries, 2019–2023 34
• Figure 4.1. 35
• Poverty reduction has de-escalated in recent years 35
• Figure 4.2. 36
• Regional and country-specific Prosperity Gap, 2019 and 2023 36
• Figure 4.3. 36
• Contribution of each country to the regional Prosperity Gap, 2023 36
• Figure 4.4. 38
• Gender Employment Gaps Index 38
• Figure 5.1. 39
• Fiscal deficits are widening in 2024… 39
• Figure 5.2. 39
• …against broad based expenditure growth 39
• Figure 5.3. 41
• Capital spending has rebounded… 41
• Figure 5.4. 41
• …while all WB6 countries have turned to higher spending on social benefits 41
• Figure 5.5. 41
• Public and publicly guaranteed debt as a share of GDP has declined to its lowest in a decade… 41
• Figure 5.6. 41
• …as has external public and publicly guaranteed debt 41
• Figure 5.7. 46
• The Country Fiscal Rule Strength Index for the WB6 countries and the EU member states from CESEE 46
• Figure 5.8. 46
• Scope Index for Independent Fiscal Institutions, in the WB6 countries and the EU member states from CESEE 46
• Figure 5.9. 46
• Medium-term budgetary framework index, in the WB6 countries and the EU member states from CESEE 46
• Figure 6.1. 47
• The pace of decline in core inflation has slowed this year 47
• Figure 6.2. 47
• In the Euro area service inflation remains elevated 47
• Figure 6.3. 48
• Inflation heterogeneity among countries persists 48
• Figure 6.4. 48
• WB6 core inflation remains high 48
• Figure 6.5. 49
• Central banks have cautiously initiated an easing of monetary policy… 49
• Figure 6.6. 49
• …continuing to allow for different degrees of exchange rate flexibility 49
• Figure 7.1. 50
• Credit growth rebounded in H1 2024 50
• Figure 7.2. 50
• Corporate credit growth resumed its pace narrowing the gap with household growth 50
• Figure 7.3. 51
• Asset quality showed limited movement 51
• Figure 7.4. 51
• Capital levels remained relatively stable 51
• Figure 7.5. 53
• Average cost of sending US$200 in remittances to WB6 countries (Q2, 2024) - percent 53
• Figure 8.1. 56
• The regional current account deficit has been widening in 2024… 56
• Figure 8.2. 56
• …with Albania, North Macedonia and Serbia accounting for the bulk of the external adjustment in 2024 56
• Figure 8.3. 56
• The merchandise trade deficit has returned to the five-year average seen prior to the pandemic, after the deterioration in 2022… 56
• Figure 8.4. 56
• …while remittances and net services exports have stagnated 56
• Figure 8.5. 57
• At the regional level, FDI inflows almost fully finance the current account deficit in 2024, although country differences are significant… 57
• Figure 8.6. 57
• …with the regional PPG external debt level projected to remain largely unchanged in 2024 57
• Figure 9.1. 59
• Contribution to growth, spring vs. autumn projections 59
• Figure 9.2. 60
• Economic Sentiment Index 2021–2024 60
• Figure 9.3. 63
• To achieve high-income status, countries will need to recalibrate their mix of investment, infusion and innovation policies 63
• Figure 9.4. 64
• Percent reduction in 2050 GDP from selected climate hazards under RCP 4.5 64
• Figure 9.5. 66
• Incremental public investment under trend growth, percent of GDP 66
• Figure 9.6. 66
• Incremental private investment under trend growth, percent of GDP 66
• Figure 10.1. 69
• Stock of emigrants from Western Balkan countries in 2021 69
• Figure 10.2. 70
• Main destination countries and regions of Western Balkan emigrants 70
• Figure 10.3. 71
• Wage differentials across Europe and net migration 71
• Figure 10.4. 72
• Profile of emigrants from the Western Balkans in OECD countries 72
• Figure 10.5. 73
• Labor market outcomes of Western Balkan emigrants in OECD destination countries 73
• Figure 10.6. 74
• Remittances in WB6 countries as a share of GDP (2023) 74
• Figure 10.7. 77
• Impact of emigration on the supply of labor and skills in Western Balkan countries 77
• Table 1.1. 17
• Western Balkans outlook, 2021–26 17
• Table 2.1. 23
• Prevalence of adult health risk factors and indicators of higher education 23
• Table 5.1. 43
• Yields on WB6 countries outstanding Eurobonds 43
• Table 5.2. 43
• Credit ratings of the WB6 countries 43
• Table 9.1. 58
• Real GDP growth in WB6 countries, percent 58
• Table 9.2. 65
• Undiscounted costs of proposed policy actions and investments for an initial detailed adaptation package (in 2020 US$ billion, US$ undiscounted) 65
• Table 9.3. 65
• Estimated CAPEX of mitigation measures under trend growth by 2050 (US$ billion, US$ discounted at 6 percent) 65
• Table 10.1. 85
• Recommendations 85
• Box 2.1: How can the WB6 countries improve their human capital outcomes? Recent evidence from an extension of the Human Capital Index 22
• Box 3.1: Who are the unemployed in the Western Balkans? 30
• Box 3.2: Does the Phillips Curve hold true in the Western Balkans? 33
• Box 4.1: Gender Employment Gaps Index (GEGI)   37
• Box 5.1: Fiscal governance in the WB6 countries: Ensuring fiscal sustainability 44
• Box 7.1: Migration and digitalization: How payment systems act as a lever 53
• Box 9.1: Escaping the middle-income trap: Insights for the Western Balkans from the new World Development Report 61
• Box 9.2: Responding to climate change in the Western Balkans 64
• Box 10.1: Data source and challenges to estimate migration numbers 69
• Box 10.2: The impact of Albanian returnees after the crisis in Greece 75
• Box 10.3: The Heimerer College in Kosovo 79
• Box 10.4: The Diaspora Invest Project in Bosnia and Herzegovina 82
• Box 10.5: Diaspora engagement in Ireland 88