North Macedonia: Growth improved in late 2024

According to available data, average real GDP rose 2.8% y/y, thus coming in slightly above forecasts. Stronger growth stems from higher consumption, mostly public, and investments spike at the end of the year, related to highway construction. Growth is projected to hover just under the 3% mark over the forecasted period. Inflation is under control, notwithstanding strong wage pressure, although caution is still warranted given the renewed surge in food prices in the last few months. Fiscal gap is still too wide, given the current level of growth, and has pushed public debt above the 60% of GDP mark. Fiscal risks are elevated due to looming 2026-2028 eurobond maturities. The departure of a small ethnic Albanian party from the government won’t immediately shake the government but it could be a sign of problems in the future.

Economy expanded 2.8% y/y in 2024, despite a slow start to the year. Growth was domestically driven, notably from the public side, as highway works accelerated towards year-end. On the external side, both exports and imports contracted, albeit exports to a larger degree, thus delivering a net negative contribution to the headline figure.

High-frequency indicators suggest relatively muted activity in 1Q25. Real retail trade activity is barely in positive territory in 1Q25, despite decent wage growth. Likewise, export of goods is stagnating as well, and another quarter of negative external contribution seems likely. Weak EU outlook, especially regarding the automotive sector, suggests negative external contribution throughout 2025. On the positive side, industrial production has been showing signs of recovery recently. We expect a positive impetus from investment to continue in 2025 as well, as construction of the Corridor 8/10d moves forward. Overall, we expect the economy to expand by 2.8% y/y this year and 2.9% y/y in 2026.

At the end of last year and during the first two months of 2025, inflation spiked to uncomfortable levels in the vicinity of 5% y/y, but prints for March and April landed at 2.7% y/y and 2.6% y/y, thus easing concerns. Detailed look reveals most of the price pressures stem from the food category, which has during the mentioned price spike on average accounted for half of the headline CPI. To curb food price pressure the government has made legislative changes in April, forcing retailers to display online product prices.

After recording a C/A surplus of 0.4% of GDP in 2023, worsening trade trends pushed the C/A into the red, amounting -2.3% of the GDP in 2024. Deterioration stems from the mentioned deterioration of trade, as the trade gap widened 2pp to 20.1% of GDP. On the positive side, FDI was highest on record, at 7.1% of GDP. Structure shows increased inflow from Germany and the UK, mostly going into the motor vehicles sector.

Since our last report in November, the National Bank has delivered two more cuts, on its December and February meetings, setting the key rate to 5.35%. We expect the central bank to remain cautious given the need to safeguard the peg, offset core inflation pressures and watch for negative spilovers due to heightened global geopolitical tensions.

Planned fiscal consolidation was interrupted after elections, with most of the additional spending stemming from pension outlays after the ad-hoc 20% hike of the average pension. MoF targets 2025 budget gap at 4% of GDP but the figure appears overoptimistic, in our opinion. Sizeable eurobond redemptions between 2026-2028 suggest heightened fiscal risks.

There has been no progress regarding the stalemate in EU accession negotiations, as the bilateral issue with Bulgaria is still preventing the country to move forward in that respect.

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