Recent Economic Developments
Output growth edged only slightly above the 2023 outturn to 1.2%in Q1 2024 solely due to domestic demand as exports dropped and imports went up marginally. Retail trade, transport and catering led growth, while agriculture and industry had a negative contribution to growth. Relative to end-2023, labor market indicators in Q2 2024 improved slightly, with the employment rate rising by a notch to 45.6%, while the participation rate remained unchanged at 52.1%. The unemployment rate dropped slightly to 12.5%, and the youth unemployment rate (15-24) remained high at 26.9%. Nominal net wage growth, driven by public sector and minimum wage increases, spiraled up to 14.8% in June 2024, outpacing inflation by close to 12 percentage points.
While headline inflation eased from double- digit growth in 2022 to 3% in July 2024, core inflation remains high—at above 5%, led by wage pressures and services. The Central Bank therefore left the main policy rate unchanged at 6.3% since September 2023. The fiscal deficit (with the state roads finances included) is projected to reach 5.1% of GDP in 2024 after a July budget revision that increased spending on wages, pensions and transfers, and lowered capital spending. Public debt went up to 61.5% of GDP in Q2 2024, mostly on account of higher issuance of domestic securities. Expenditure arrears have surged to 4.7% of GDP in Q2 2024 on account of poor fiscal discipline of local utility companies, public health institutions, and state-owned enterprises.
Banking sector stability has been maintained in line with an increase in the capital adequacy ratio to 18.9% in Q1 2024, while the liquidity rate settled around 20%. At the same time, the NPL ratio went above 3% for the first time since 2022, suggesting that recent economic shocks have impacted corporate performance. The current account balance (CAB) returned to negative territory at 1.3% of GDP in Q1 2024 owing to a worsening of the goods trade balance, while services exports held up and remittances eased. External debt slightly declined to 81.8% of GDP, but roughly half of the total is private and mostly related to intercompany lending.
Economic Outlook
The medium-term outlook remains positive, but risks are tilted strongly to the downside. Growth is expected to step up in the medium term to an average of 2.7% during 2025-2026. This projection assumes a rebound of public investments and a gradual recovery of consumption and exports. Headline inflation is projected to remain above or close to 3% in 2024-25, but to slow thereafter to a long-term average of 2%. Poverty rates are projected to maintain a slow declining pathway, helped by real wage and employment growth, falling by a further 1.2 percentage points over the forecast period.
The baseline scenario is built on the assumption that the focus on the EU accession agenda remains a priority for the new administration that won general elections in May 2024. At the same time, low productivity, inefficient capital deployment, and weak external demand, compounded by limited fiscal space and rising fiscal risks amidst high interest rates, continue to impede growth prospects and further slow the pace of income convergence with EU peers. Additional delays of decarbonization targets, along with carbon pricing, risk a loss in domestic public revenues and international competitiveness given the start of the EU Carbon Border Adjustment Mechanism. In this context, following up on the Growth Plan pledges is critical to carve out a growth-conducive economic environment.
Last Updated: Oct 22, 2024
