The Republic of Macedonia last year had the third highest growth of Gross Domestic Product (GDP) in Europe and this year it is forecasted to be fourth according to the projected growth of entire European continent, the European Commission says in today’s Spring economic forecast.

Macedonia has growth of GDP by 3.1% which is only slightly less than Romania (3.5%) and Lithuania (3.3%) while the entire European Union has growth of only 0.1%, the euro area was in recession (-0.4%), the US in surplus of 1.9% and Japan with GDP growth of 1.5%.

Macedonia for this year is forecasted to have GDP growth of 3.0% and only Latvia (+3.8%), Lithuania (+3.3%) and Poland (+3.2%) will be better than Macedonia.

Real GDP growth is forecast to advance with moderation in 2014, at 1.6% and 1.2% respectively in the EU and the euro area, before gaining some further speed to respectively 2.0% and 1.7% in 2015.

In contrast to the sharp but short-lived upturn in 2010, the current recovery in the EU and euro area is more balanced regionally, as it involves also most of the vulnerable Member States. Real GDP growth in the most EU countries is projected to be positive as of this year (with the exception of Cyprus and Croatia) and growth is expected to accelerate next year. Substantial, but receding, differences in economic performance will remain. Among the largest economies, economic growth is expected to be sustained in Germany while the recovery is firming in Spain and slowly gathering pace in France and Italy. In the UK, growth is becoming firmly established.

In relation to Macedonia, the forecasts for GDP growth are positive even for 2015 when the European Commission forecasts the growth to be 3.2%.

The European Commission's spring forecast points to a continuing economic recovery in the European Union following its emergence from recession one year ago. Real GDP growth is set to reach 1.6% in the EU and 1.2% in the euro area in 2014, and to improve further in 2015 to 2.0% and 1.7% respectively. The forecast rests on the assumption that the agreed policy measures will be implemented by Member States and the EU, taking forward the necessary adjustment.

Siim Kallas, Commission Vice-President said: "The recovery has now taken hold. Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving. Continued reform efforts by Member States and the EU itself are paying off. This ongoing structural change reminds me of the profound adjustment that the central and eastern European economies undertook in the 1990s and in subsequent years, linked to their joining the EU exactly 10 years ago. Their experience shows how important it is to embrace structural reforms early on and to stay the course, whatever challenges may be faced along the way. In this spirit, we must not lessen our efforts to create more jobs for Europeans and strengthen growth potential."

Carried by the external sector, the economic recovery that had started hesitantly in the second half of  2012, gained firm ground last year. Output expanded by 3.1% in real terms in 2013. Growth is projected to remain at around 3% this year, and accelerate somewhat next year, driven by domestic demand. Investment spending is expected to regain momentum, on account of public infrastructure and foreign direct investments, although not reaching its high growth rates of 2011 and 2012. Private consumption is also projected to contribute positively to growth, picking-up moderately, but steadily, reads the Spring Economic Forecast regarding Macedonia.

According to the EC, the solid growth of export volumes, mainly on account of foreign facilities in the country, and declining imports provided the basis for the firming economic recovery in 2013. Real GDP expanded by 3.1%, notwithstanding an unexpectedly large decline in investment spending, by 11.5%. Household consumption, fuelled by rising pensions and other entitlement spending, grew by 4.2%, even though its growth decelerated somewhat in the second half of the year. On the production side, the biggest contribution to GDP growth came from the construction sector, which increased output by 33% y-o-y, after 4.8% in 2012, largely outperforming the manufacturing sector.

However, manufacturing production strongly increased in the fourth quarter and continued to post sizeable gains also in the first two months of 2014.

The profile of growth is expected to change again over the forecast horizon, with a renewed pick-up in investment, and household consumption taking the lead. Both, public and foreign direct investment is projected to increase, given the Government's ambitious programme to attract foreign investors, which has led to a confirmed pipeline of new projects, complemented by a gradual strengthening in credit to the corporate sector. Household consumption growth, too, is likely to remain resilient, in line with projected increases in disposable income, based on expectations for a positive employment trend, higher social transfer s, and roughly stable remittances. With new foreign investors planning to take up production, the related increase in imports is expected to lead to a renewed widening of the trade balance over the forecast horizon. Net exports would negatively impact on growth in both years, the EC forecasts.

Employment rose markedly in 2013, by 4.3% compared to the previous year, supported by a strong build-up in the public sector and significant gains in construction and manufacturing. Further employment gains are expected, mainly on account of the investment-led expansion, and increased spending on labour market measures. Provided that structural reforms to improve the business environment are carried out (such as a facilitation of licensing procedures), employment creation could be further incentivised. The unemployment rate remained high, even though on average it dropped by 2 pps. to 29% in 2013 compared to the previous year. On account of the ongoing recovery, further improvements are expected.

The current-account deficit narrowed in 2013 by 1.1 pps. to 1.9%, on account of an improving merchandise trade balance, and in spite of a drop in current transfers, which traditionally finance the bulk of the trade deficit. In 2014, strong growth in import volumes is expected, as a result of the start of new public and foreign direct investment. With the beginning of production activity by new foreign entities, export growth would gradually accelerate over 2014-15. The merchandise trade balance would deteriorate over both years, although it would prove less of a drag on growth in 2015 than in 2014. Mainly on account of an expected further decline in private transfers, in combination with the widening commodity trade deficit, the current-account deficit is projected to almost double in 2014. Current-account financing will thus depend increasingly on FDI inflows and on government external borrowing. The latter is expected to increase given the sizeable financing needs of public infrastructure investments, reads the EC spring economic forecast on Macedonia.

The general government budget deficit in 2013 amounted to 4.1% of GDP. This was slightly higher than the target, which had been revised in the autumn from 3.6% to 3.9%. In line with its medium-term fiscal strategy, the government is embarking on an expenditure-based fiscal consolidation as of 2014. The 2014 target for the general government deficit is set at 3.5%, and at 3.2% for 2015. Yet, the source of budgetary savings to support the consolidation is unclear. An ambitious public investment programme, rises in pensions and other transfer payments, as well as a further envisaged increase in public wages rather suggest continued pressures on total spending. The government remains committed to a low-tax environment and plans to lower the revenue ratio by a further 1.3 pps. to 31.3% of GDP between 2014 and 2016. Overall, the deficit may widen further in 2014 and only narrow thereafter, if spending is reigned in after the elections. The expected financing needs are likely to lead to further increases in general government debt. After having jumped by 2.0 pps. y-o-y in 2013, the gross debt ratio could rise by another 4.8 pps. until 2015, reads the EC forecast.