EC forecast: Macedonia's GDP growth in next two years to be higher than one of EU, euro area

From a moderate recession to an investment driven recovery. That is how the European Commission views Macedonia's economy in its autumn economic forecast for this and next two years.

Following the GDP contraction for 0.9% in 2009, and its growth for 2.8 and 2.9% in 2010 and 2011 respectively, the EC predicts that this year Macedonia will register a growth of 0.8 percent.

In the second half of 2012, economic activity is expected to return to positive growth rates, partly benefitting from a base effect but also due to the positive effects of recent foreign investments. This could bring annual growth into positive territory, although still below 1%. In 2013 and 2014, stronger investment and private consumption, should help to reach slightly higher growth rates, the EC report reads.

According to the Commission's autumn forecast released on Wednesday, real GDP is set to contract by 0.3% in the EU and 0.4% in the euro area this year. In the first half of 2013, growth is expected to gradually return: GDP is projected to increase by 0.4% in the EU and 0.1% in the euro area, although large divergences across member states will remain.

In regard to Macedonia EC does not expect the deficit to go below 3% before 2014, as the authorities remain committed to meet their recently revised deficit target of 3.5% in 2012 and 2013. Given the governments' medium-term strategy of increasing spending for public investment, the authorities will have to maintain their policy of containing spending for underperforming revenues, the authorities revised the deficit target from 2.5% of GDP for 2012 to 3.5%. The deficit target for 2013 is also 3.5% of GDP.

The debt ratio is expected to increase further from this year 31.0%, reflecting subdued nominal GDP growth, slightly rising debt financing costs and higher primary deficits. Envisaged additional investment projects, such as plans to improve the country's transport infrastructure or to modernise the countries' ageing energy production facilities, could lead to a further increase in the debt ratio to 35.0% in 2014.

The EC most serious concern is related to Macedonia's unemployment rate. "The labour market experienced a weak first quarter and a slightly better second quarter, resulting in largely unchanged unemployment rate in the first half of 2012, at 31.4%, compared to 31.5% the year before. Youth unemployment continued to increase slightly, reaching 54.9% of the age group's labour force," the report reads.

In 2014 the EU unemployment rate is expected to hit a record of 11.0%. The forecast for the euro-zone stands at 12%.

Macedonia's inflation rate is expected to decelerate in 2013, following high price rises in 2012, but - on the back of stronger growth - to accelerate again in 2014.

The trade deficit is likely to rise. The high import content of investment will lead to rather strong import growth, which will more than offset higher exports, resulting from market share gain as a result of increased FDI inflows, the EC forecast reads.

"Our projections point to a gradual improvement in Europe's growth outlook from early next year," Olli Rehn, Commission Vice-President for Economic and Monetary Affairs, said at a presentation of the EC autumn economic forecast.