North Macedonia – Growth still appears under pressure

Burdened with slowing growth and weak demand in key trading partners, poor investment appetite and below average agricultural season, real GDP expanded just 1% y/y in 2023. High-frequency indicators, except for retail, suggest meager output carried into the 1Q24. Inflation dropped to around 3% at the end of last year but risen again to 4% in March and April after the freeze on certain food items expired. The government's fiscal space is limited due to continuous wage pressures and Eurobond maturities in 2025 and 2026. The recent parliamentary and presidential elections have resulted in a change in government, with power now shifting to the right-side spectrum.

Economy expanded 1% y/y 2023. Despite stagnating exports, a strong drop in imports in 2023 means the biggest impulse to growth came from the net external side. On the domestic side, personal consumption continued its steady positive contribution, but public spending surprised negatively as it contracted on a yearly basis. The biggest hit came from the investments side as together with inventories they recorded a drop of 16.7% y/y.

High frequency indicators suggest weak economic activity continued at the start of 2024 as well. Industry declined 2.4% y/y on average in 1Q with a heavy contraction in manufacturing activity in March. On the external side, exports of goods moved deeper into negative territory showing a 9.2% y/y drop in 1Q, alongside stagnating imports thus suggesting strong negative contribution early in the year. We expect a positive impetus from the investment and inventory side, especially in 2H24. Overall, we have slashed our expectations for 2024 by 0.3pp, now forecasting average GDP growth of 2.3% y/y this year, before accelerating to 3.4% y/y in 2025 as the 8/10d highway project gains more traction and external demand recovers. 

Inflation has come a long way since it peaked in late 2022 at almost 20% y/y. In 1Q24 it averaged 3.4% y/y, with food prices still the dominant driver especially after the expiration of temporary freezing of certain food items which started to feed into inflation as of March. Acknowledging overall easing of supply-side pressures, decline in global oil prices and slowdown in imported inflation, we expect the inflation rate to average 3.5% y/y and 3.2% y/y in 2024 and 2025 respectively.

The country recorded a C/A surplus of 0.7% of GDP in 2023, only the second time in its history. Improvement stems from the narrowing of trade deficit as imports declined heavily after stockpiling in previous years and better domestic electricity production. For this year we forecast a moderate deficit of around 3% of GDP due to reemerged pressures on the trade balance side, as the 8/10d highway project accelerates.

Monetary policy remains on the cautious side, with the CB bill interest rate at 6.3% since September. Changes were made to the reserve requirement setup and maintenance, mainly aimed at further supporting the denarization process and increasing long term savings in the banking system. Reserves recovered from earlier losses incurred at the start of the war in Ukraine, and now after 1Q24 cover almost 5 months of imports.

Both budget revenues and expenditures increased by roughly 14% y/y, resulting with a 16.5% y/y wider budget gap landing at 4.9% of the GDP. Budget gap should narrow by 0.5pp this year due to lower subsidization of electricity prices and stronger GDP growth.

This year’s twin elections resulted in a triumphant victory for the right-wing VMRO DPMNE and a crushing defeat for the pro-EU Social Democrats. Talks about government formation should be concluded soon.

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