EC: Macedonia with the second highest GDP growth in Europe last year

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Macedonia’s economic growth in 2013 was among the best in Europe, according to the European Commission’s winter forecast 2014, MIA correspondent reports from Brussels.

According to the forecast, presented Tuesday in Brussels by EU economics commissioner Olli Rehn, Macedonia’s economic recovery strengthened in the first three quarters of 2013 and was supported by a strong contribution from net exports. Despite a remarkable pick up in private consumption, domestic demand provided only a small contribution to growth, given the major slump in investment. In line with projected developments in foreign direct investment, the forecast expects a turnaround in this profile for 2014 and 2015, with investment strengthening again and the foreign balance proving a drag on growth.

Macedonia’s real GDP in 2013 increased by 3.2% compared to the previous year, with net exports and private consumption taking over from investment as growth drivers. Contrary to earlier official estimates, gross capital formation declined in each of the three quarters, in annual terms, and by a total of 15% on the year.

Stimulated by supportive fiscal measures, private consumption increased by an accumulated 5.1% in the first three quarters. Supported by a benign external environment and by new foreign direct investment, net exports of goods and services contributed positively to output growth for the first time since 2010. Among the sectors, the construction industry largely outperformed manufacturing and grew by 33% on the year, after average growth of 4.8% in 2012.

The profile of growth is expected to change again over the forecast horizon, with a renewed pick-up in gross capital formation, and further gains in household consumption taking the lead. Both public and foreign direct investment are projected to increase, coupled with gradual strengthening in credit extension to the corporate sector. Household consumption is likely to post resilient growth rates over the horizon, in line with expectations for disposable income, deriving from a positive employment trend, higher social transfers, and stable remittances. With new foreign investors taking up production over the horizon, the forecast expects a renewed strengthening of import demand. Notwithstanding the further improvement in major export markets, a renewed, gradual deterioration of the merchandise balance is likely.

Hence, net exports would impact negatively on growth in both years. This drag could prove sizeable, if FDI, the main source of the country’s exports, evolves less vigorously than expected, reads the forecast, titled ‘Recovery is Gaining Firm Ground in Spite of Weaker Investment’.

Aided by the firming recovery and official employment programmes, the number of unemployed had decreased by 4.5% at the end of September 2013, compared to a year earlier. With a significantly smaller increase in the labour force, this lowered the unemployment rate to 28.7%, down from 30.6% a year earlier. The number of employed persons increased by 4%, bringing the employment rate to 40.8%, up by 1.7pp from a year earlier, with virtually no change in the total working age population. However, the unemployment rate for 15 to 24 olds remained largely unchanged at 52% over the year. Driven primarily by the expected pick up of public and foreign direct investment, as well as by a continuation of active labour market policies employment is expected to rise further, albeit less strongly, while the unemployment rate would drop further over the forecast horizon.

While the current-account deficit presumably narrowed somewhat in 2013, due to an improving trade balance, in spite of lower private transfers, the forecast expects it to deteriorate again, due to renewed widening of the merchandise deficit. However, the need for external borrowing to finance the current-account deficit was mitigated in 2013 by a renewed pick up in FDI, and is likely to remain so over the forecast horizon. At the end of the third quarter, FDI inflows reached 3.3% of accumulated GDP, compared to 0.9% at the same time in 2012. Given the increasingly benign investment trends in the country’s major trade partners, and the government’s active recruitment, the forecast expects FDI to remain elevated.

The general government deficit for 2013 was revised in the autumn from 3.6% to 3.9%, following the adoption of a supplementary budget. In view of anticipated consolidation measures, the forecast expects the deficit to gradually narrow to around 3.6% in 2015. After having jumped in 2012 by 5.6pp to 34% of GDP, the general government debt ratio is expected to have increased by somewhat less in 2013. However, overall public debt, which includes the debt of state-owned enterprises, public agencies and public financial institutions, is likely to be significantly higher. It would also comprise the newly established Public Enterprise for State Roads through which the government channels the increasingly important road infrastructure expenditure – and which can borrow on its own behalf with its debt guaranteed by the government.

In conclusion, in order for general government debt levels to stabilise, fiscal deficits would have to decrease more substantially than targeted. This is likely to prove difficult in view of recently implemented pension increases, public wage rises as of this year, and an increase in social transfers.

The EC winter forecast 2014 for Macedonia projects GDP growth of 2.5 and 2.6 percent in this and next year respectively.

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