Quarterly forecast on South-Eastern Europe

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This quarterly report by the ICEG European Center forecasts outstanding economic growth with significant external imbalances and slowly decreasing unemployment in South-Eastern Europe (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, the FYR of Macedonia, Romania and Serbia and Montenegro).


Economic Growth 

In 2005 economic growth rate will decrease slightly in the Southeast European countries compared to the previous year. However, GDP growth remains strong in this region, the average rate of the seven SEE countries is close to 5% (it means the growth rate of Southeast European countries is almost the same as that of the New Member States). This is a 0.4% drop back compared to 2004. 

The real GDP growth is expected to slow down somewhat in Bosnia-Herzegovina, Romania and Serbia and Montenegro, while, Albania and Bulgaria will be able to keep the pace of last year’s economic growth. Only Croatia and the former Yugoslav Republic of Macedonia are expected to increase their GDP growth significantly in this year. According to our expectations, Albania and Bulgaria can reach the highest GDP growth in 2005, 6.0% and 5.8% respectively, while the performance of the former Yugoslav Republic is expected to be the weakest in 2005, GDP growth can be 3.5% this year. It is also an interesting fact that the standard deviation of economic growth rates decreases significantly in the region this year from 1.8% to 0.8%, which reflects convergence among GDP growth rates of this region’s countries. 

In 2005 domestic demand remains the main engine of economic growth in the region. While foreign demand is weak and the growth of export will decrease in 2005 compared to the previous year, the role of consumption and investments remains dominant in this year. However, the main reason for the slightly decreasing economic growth pace is right that the expansion of domestic demand slows down in several economies in the region. 

Monetary Conditions 

In most Southeast European countries price stability or low inflation rate characterises the economy. Among foreign factors, on the one hand, the increasing oil prices had a negative impact on inflation development, on the other hand, the appreciation of the euro against the US dollar supported decreasing inflation in 2004. 

In most Southeast European countries the currencies are fixed to the euro, moreover, Montenegro adopted euro as its de-facto currency of the country. Thus, the appreciation of the euro has meant the appreciation of these currencies against the US dollar, which decreased the prices of import goods denominated in US dollar. 

In 2004 the inflation rate was 4.7% on average which will increase slightly in 2005. In most SEE countries inflation remains low or disinflation process will continue except for two economies: Bulgaria and Serbia. In case of Bulgaria, the rapid economic growth has a negative impact on inflation through increasing demand, while, in Serbia the introduction of VAT – at a 18% rate – has a one-off negative impact on price increases. In the last several years Romania had the highest inflation rate in the region but in 2005 Serbia will inherit this ‘title’. 

In several countries of the region credit boom characterises the economy similarly to the NMSs. Thus, national banks adopted cautious measures and cut interest rates carefully. Thus, reference rates were mainly unchanged or slightly decreased in the region, in line with the declining inflation rate. Significant interest rate cut was observed only in Romania where disinflation process evolved considerably in last year. In 2005 we expect that rates will remain on the same level as last year except for Romania where significant interest rate cuts were observable in the first few months in 2005. 

Fiscal Policy 

General government deficit is lower in these economies on average compared to that of the New Member States. Undoubtedly, in most economies of the SEE region the applied exchange rate regimes and tight monetary policies strongly determine the fiscal policy and the evolution of budget deficit. In 2004 general government deficit reached less than 2% of GDP on average, while, this figure will change only slightly in 2005. In most SEE economies, the deficit will be lower in 2005 compared to last year, only Bulgaria and Romania will have higher general government deficit. In Bulgaria elections which will be held in June 2005 can have a negative impact on the balance, while in Romania, the introduction of flat tax regime will decrease the revenues of the Romanian government. 

On the one hand, the public debt/GDP figures are rather low in most SEE countries. On the other hand, the relatively good general government balances and the strong economic growth support the further decline of the public debt per GDP ratio in 2005. The public debt per GDP figure is expected to decrease even in Croatia where the amount of public debt grew dynamically in last years due to the large public infrastructure projects. 

Balance of Payments 

External imbalance is one of the main macroeconomic problems in most Southeast European countries. In general, foreign trade balances have huge deficits in SEE region and this factor greatly influences the development of current account balance. In 2004 the current account deficit reached 10% of GDP on average due to the aforementioned high foreign trade deficit trade (23.4% on average). However, in these economies, the roles of services balance and remittances are much higher than in the New Member States. The significant difference between the foreign trade balance/GDP and current account/GDP figures also reflects the high role of these elements. The only country in the SEE region where the structure of the current account balance is similar to that of the NMSs is Romania. In Romania’s case, the foreign trade deficit was ‘only’ 9% of GDP while C/A deficit reached 7.5% in 2004. 

In 2005 the current account balances will improve in mainly those economies where the C/A per GDP ratio is the highest, namely in Bosnia-Herzegovina and Serbia and Montenegro. The C/A balance will worsen considerably in this year in Bulgaria and Romania by almost 1%-point. This worsening is due to the increasing deficit of foreign trade balance which is a result of the strong import demand of these economies. 


Unemployment is a key issue in Southeast European countries, the official unemployment rate exceeds 20% on average. The only one country where unemployment rate is a single digit figure is Romania. On the other hand, one can observe the highest unemployment rate in Bosnia-Herzegovina, in the former Yugoslav Republic of Macedonia and in Serbia and Montenegro, unemployment rates are over 30% in these economies. According to estimations, the real unemployment rate is significantly lower in these economies, it can be around 20%, however, this rate is still really high. 

In 2005, slight improvement is expected in most SEE countries regarding employment and unemployment due to the strong economic growth and new investments realised by foreign investors. However, the progress in privatisation process may have a dampening effect on the employment in these countries.

To read the report in full, visit the ICEG European Center website.

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