North Macedonia: Growth should accelerate over the medium term

According to available data, recovery in 2024 remains constrained. Underperformance stems from delays in highway construction and slow recovery of key external markets, notably Germany. Growth is projected to accelerate over the forecasted period, but risks are largely to the downside. Headline inflation eased to around 3% but core inflation remains high reflecting wage gains and subsequent price pressures in the service sector. Both the budget gap and debt level remain above the introduced fiscal rules, with only modest narrowing projected. Political power shifted towards the right-spectrum following June’s elections. The new coalition led by VMRO-DPMNE should remain stable and maintain a pro-EU policy stance albeit we don’t expect a quick fix regarding the bilateral issue with Bulgaria. Hence, progress on the EU path is likely to remain modest at best.

Economy expanded 1.8% y/y in 1H24, with growth rate moving above 2% y/y in the 2Q for the first time in two years. Positive impulse came from a drop in imports, thus alleviating external pressures as exports remain muted. On the domestic side, personal consumption slowed compared to 2023 growth pace, but public spending supported growth although possibly due to pre-election spending. After strong positive reading early in the year, largely due to base effect, gross capital formation again contracted in 2Q.

High frequency indicators suggest some improvement of economic activity in 2H24. Real retail trade activity rose 5.4% y/y on average in 3Q, while industrial production remained in the red, albeit easing its downturn. Trade balance data suggest less of a drag in the quarter as imports declined. We expect a positive impetus from the investment and consumption side going forward. The former benefits from the start of highway construction as issues appear to have been resolved, while the latter benefits from strong real wage growth. Overall, we expect the economy to accelerate 2% y/y this year, and accelerate to 2.6% y/y and 3.3% y/y in 2025 and 2026.

While headline inflation has come a long way since it peaked in late, easing to 3.5% y/y in October, core inflation remains a source of concern as it landed at 5.9% y/y in the same month. Acceleration of core inflation stems from high wage gains as well a surge in service prices. We expect headline inflation to drop below 3% in 2Q25, and remain there for the rest of 2025.

After recording a C/A surplus of 0.4% of GDP in 2023, worsening trade balance pushed the C/A into the red, amounting -1.4% of the GDP at 1H24 (on a 4QMA). Given expected widening of the trade gap due to highway related imports and still muted export performance, we expect a deterioration in the mid-term. The gap should remain more than covered by FDI inflow throughout the forecasted period.

Monetary policy remained on the cautious side longer than elsewhere in the region, with the CB bill interest rate at 6.3% until September. Since then we saw two consecutive 25bps cuts. We expect the central bank to remain cautious given the need to safeguard the peg, offset core inflation pressures and watch for spilovers due to heightened global geopolitical tensions.

Fiscal consolidation is once again postponed due to pre-election spending related to the former administration but also post-election decision of the new administration to increase pensions and part of public sector wages. Due to subdued growth and high projected budget gaps, public debt to GDP ratio will continue to rise.

Following their triumphant victory in June elections, right-wing VMRO DPMNE soon formed a coalition government with ethnic Albanian parties. The coalition appears stable and should maintain a pro-EU policy approach albeit, according to early statements, not at all costs.

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