High inflation and political uncertainty were the main blow to the Montenegrin economy, according to the EU Spring Economic Forecast for 2023. It is stated that the recently held presidential elections and the announced parliamentary elections scheduled for June could result in a more stable political situation, but that uncertainties remain high, with the likelihood of postponing the reform process and diverting focus from immediate economic challenges.
The Montenegrin economy continued to grow rapidly in the first half of 2022, as a result of private consumption and a good tourism season, according to the Spring European Economic Forecast for 2023. However, growth started to slow down in the second half of the year, which is forecast to will continue in 2023 as high inflation and rising borrowing costs weigh on household consumption and investment, despite notable increases in public sector wages, pensions and social benefits. The budget deficit is expected to decline only gradually.
After strong growth in the first half of 2022, the economy slowed down in the second half of the year, bringing full-year real GDP growth to 6.1%. High inflation and political uncertainty were the main blow, according to the forecast.
In 2022, economic activity was driven by an increase in private consumption and exports, benefiting from policy measures, which included a sharp increase in the minimum wage and the abolition of mandatory health insurance contributions – the document states.
Economic activity, as stated, is also supported by the influx of Russian and Ukrainian citizens and the continued recovery in tourism. In contrast, gross investment in fixed capital decreased, while government spending expanded only slightly. The increase in domestic demand resulted in a rapid expansion of imports. The document states that the presidential elections were held in April, while the extraordinary parliamentary elections were scheduled for June.
Although they could result in a more stable political situation, uncertainties remain high, with the probability of delaying the reform process and diverting focus from immediate economic challenges – the document emphasizes.
The slowdown in growth should continue amid the irreversible effects of high inflation, tighter financing conditions, and continued high political uncertainty, as well as weaker external demand. As a result, economic growth will be moderate in 2023 because these factors, together with base effects, will affect private consumption, investment recovery and tourism exports. Nevertheless, GDP growth could regain some momentum in 2024, as capital investments are likely to increase against the background of a more stable political environment and stabilization of financing costs – the EU report states.
Trade and current account deficits are forecast to narrow in 2023 due to an expected slowdown in private consumption growth. External deficits are expected to increase again to some extent in 2024 following higher investments. The balance of risks is tilted to the downside due to weak growth prospects in the EU, rising financing costs and the impact on confidence following political uncertainty in the country.
The banking sector is said to be well capitalized and has sufficient liquidity. However, while banks will continue to support the economy, rising borrowing costs will reduce credit demand in 2023. An expected acceleration in investment in 2024 could support credit activity, especially for the corporate sector, the forecast said.
EU economy resilient, despite challenges
The European economy continues to show resilience in a challenging global context. Lower energy prices, easing supply constraints and a strong labor market supported moderate growth in the first quarter of 2023, allaying recession fears.
The European economy is in better shape than we predicted last fall. Thanks to determined efforts to strengthen our energy security, an extremely resilient labor market and the easing of supply restrictions, we avoided the winter recession and are ready for moderate growth this year and next – said European Economic Commissioner Paolo Gentiloni.
The beginning of the year, according to the EU, is better than expected, and raises the prospects for EU economic growth to 1.0% in 2023 (compared to 0.8% in the winter forecast) and 1.7% in 2024 ( 1.6% in winter).
According to Eurostat’s preliminary estimate, GDP grew by 0.3% in the EU and by 0.1% in the eurozone in the first quarter of 2023. Leading indicators point to continued growth in the second quarter. The European economy, as stated, managed to curb the negative impact of the Russian war of aggression against Ukraine, overcoming the energy crisis thanks to the rapid diversification of supply and a significant drop in gas consumption.
Noticeably lower energy prices are making their way through the economy, reducing the production costs of companies. Consumers are also seeing their energy bills fall, although private spending will remain muted as wage growth lags behind inflation, according to Europe’s spring economic forecast.
As inflation remains high, financing conditions will further tighten.
Although the European Central Bank (ECB) and other EU central banks are expected to be nearing the end of the cycle of interest rate increases, the recent turbulence in the financial sector is likely to add pressure on the price and ease of access to credit, slowing investment growth and especially housing investment – he states are in the forecast.
