Economic growth in the Western Balkans slowed to 2.6 percent in 2023, from the 3.4 percent reached in 2022, reflecting the impact of weak growth in the European Union (EU), a key trading partner for the Western Balkans. With the ongoing impact of Russia’s invasion of Ukraine and the inflationary spike that it unleashed, the EU’s growth slowdown, from 3.6 percent in 2022 to 0.6 percent in 2023, impacted adversely trade, investment and business confidence in the Western Balkans.
However, as of end-2023, levels of real GDP in the Western Balkan countries surpassed the pre-pandemic levels. Growth performance surprised positively in Serbia and Montenegro. While the post-pandemic recovery in 2021 and 2022 displayed duality—with the more manufacturing-oriented economies (Serbia, Bosnia and Herzegovina, North Macedonia) most affected by the slowdown in the EU, and the more services-oriented economies (Albania, Montenegro, Kosovo) benefiting most from the demand for tourism and international travel—this duality was partially reconciled in 2023, due to a normalization of economic activity.
The regional labor market continued to perform well in 2023. Unemployment declined across all countries, with the overall rate reaching 10.9 percent in 2023. Real wages increased in 2023, reversing trends in 2022 during which inflation outpaced wages.
Poverty in the Western Balkans returned to its declining trend during 2023, but at a slower pace than pre-pandemic, from over 3 percentage points annually pre-pandemic to about 1 percentage point annually between 2022 and 2025.
After increasing to levels not seen in decades, inflation rates in the region fell during 2023, primarily driven by decelerating international commodity prices, particularly energy and food, which account for a high share of consumption baskets in the region.
While the region is expected to return to its pre-pandemic trend in 2024, this is insufficient to enable faster convergence with EU income levels over the medium term. The EU’s new Growth Plan for the Western Balkans, approved in late 2023, offers an opportunity to catalyze growth-enhancing reforms and investments.
The structural reforms are critical to invigorate growth in the Western Balkans toward faster and more sustainable improvements in living standards.
The spotlight in this edition of the Western Balkans Regular Economic Report focuses on the role of cities as engines of growth and a leading actor in the green transition.
Often small and sparsely populated, and experiencing demographic decline, cities in the Western Balkans are exposed to multiple natural hazards, extreme heat, and poor air quality. This spotlight recommends action on three main fronts to make cities in the region greener. First, make cities more compact, which is good for growth, budgets, and the environment. Second, expand public transport, make buildings more energy efficient, and improve waste management. Third, adopt measures to reduce extreme urban heat, to improve citizens’ health and productivity.
