The Montenegrin economy’s growth rate decreased to 2.5 percent in the first quarter from 2.9 percent as reported by the European Commission in its previous quarterly analysis of candidate countries’ economies for EU membership.

The European Commission indicated that the Western Balkans experienced a notable deceleration in economic growth during the first quarter of 2025, with real GDP growth in the region dropping to 2.3%, compared to 3.3% in the preceding quarter.

“Every country experienced lower growth compared to the last three months. Serbia, the region’s largest economy, faced the most significant decline, falling from 3.3% to 2%. Northern Macedonia and Albania maintained higher growth,” the report noted.

Household consumption continued to be a crucial factor for growth in the first quarter of 2025, even though its increase decelerated—often significantly—across most regional economies. This consumption was buoyed by ongoing wage growth throughout the region.

Gross investments in capital significantly surged annually in Kosovo, whereas in Montenegro, growth slightly slowed but remained elevated. Conversely, Serbia saw its investments drop for the first time in five years, with GDP growth primarily driven by substantial inventory increases. Growth in gross investments, including stock changes, significantly aided the growth in Northern Macedonia and Bosnia and Herzegovina.

“Foreign trade was characterized by stronger import increases in comparison to exports, leading to a negative effect on GDP from international trade,” stated the EC.

The unemployment rate declined in most countries during the first quarter of 2025, although the pace of employment growth eased to 0.2%.

“Overall, unemployment rates in the region were historically low but still exceeded those in the EU, ranging from 8.2% in Serbia to 13.4% in Bosnia and Herzegovina,” the report highlighted.

Montenegro to enhance fiscal sustainability by controlling public expenditure

Within the section addressing Montenegro, the report emphasized the importance of maintaining a common economic and financial dialogue between the EU and regional partners. Montenegro is encouraged to control public spending and utilize surplus revenues to further reduce its public debt. The guidelines also advise Montenegro to implement budgetary measures aimed at increasing revenues, prepare a comprehensive fiscal risk assessment, including risks related to state-owned enterprises, and establish a fiscal council.

It was noted that as of June 27, the European Union and Montenegro temporarily closed Chapter 5 on public procurement in the accession talks. In June, Montenegro also signed two grant agreements with the European Investment Bank, valued at a total of 35.5 million euros, which are part of the Eastern Mediterranean corridor that connects Montenegro and Serbia. In July, the European Bank for Reconstruction and Development approved a loan of 200 million euros for Montenegro to build another section of the Bar-Boljare highway.

Macroeconomic indicators

The EC reported that real GDP growth slowed to 2.5% in the first quarter of 2025, down from 2.9% in the previous quarter. In 2024, real GDP grew by 3%, compared to 6.3% the previous year. In the first quarter of 2025, the primary drivers of growth were private consumption and gross investments in fixed assets, which increased by 8.5% and 10.4% respectively.

“The growth of public spending decelerated to 1.4%, compared to 4.8% in the fourth quarter of 2024, with imports rising by 4.6%, contributing negatively to net exports’ GDP by 4.5 percentage points,” the report concluded.

Industrial production fell by 4.2% in the first quarter of 2025 but rebounded with an increase of 11.8% in April and 29.1% in May. The initial drop was mainly due to a reduction in electricity production (-13.4%), while mining and processing sectors saw increases of 11.2% and 1.9%, respectively. The value of construction work increased by 1.5%. Continued strong consumer demand supported retail growth (+5.1%), which continued into April (+1.2%) and May (+6.6%), as stated.

Labor market

After two consecutive years of improvement, the labor market exhibited mixed results in the first quarter of 2025, according to the EC.

As per the Labor Force Survey (LFS), employment dropped for the third consecutive quarter (-4.4%), compared to a growth of 10.1% in the same quarter the previous year. The participation rate for the 15-64 age group fell to 71.5% from 72.3%. Although unemployment decreased to 11.4% from the previous quarter and was lower than 12% in the first quarter of 2024, male unemployment rose to 13.9% (up from 10.3%), while female unemployment fell to 8.3% (down from 14.2%). The average net salary (excluding taxes and contributions) in May rose by 21.9% to 1,014 euros, partly due to a reduction in pension contributions. Gross salary increased to 1,208 euros, up from 1,042 euros a year ago.

External sector

The EC reported an increase in the current account deficit, reaching 18.2% of GDP in the first quarter of 2024. This was attributed to trade deficits (44.7% of GDP compared to 44.3%) and a slight reduction in service surpluses (21% versus 21.2%). The secondary income surplus diminished to 5.7% of GDP, while the primary income deficit remained stable at 0.2%. The net inflow of foreign direct investment remained stable over four quarters until March 2025 at 6.6% of GDP.

Inflation

Inflation reached 4.6% in June, up from 3.8% in April and an average of 3.2% in the first quarter. The primary drivers of inflation between January and June were price increases in health (+10%), accommodation and catering (+8.5%), recreation and culture (+6.9%), and alcoholic beverages (+5.9%). Food price increases were modest (+2.4%), while transportation prices rose by 0.7%, as detailed in the report.

Banking sector

The EC assessed Montenegro’s banking sector as stable and profitable. Return on equity decreased slightly to 2.1% from 2.7%, and the share of liquid assets in short-term liabilities fell to 24.9% from 26.6%. Lending activity by commercial banks continued to grow (+17.2% in May), after 15.2% in April and 14.4% in the first quarter. This growth was mainly driven by lending to households (+18.6%) and businesses (+17.8%). Loans to banks and government enterprises increased by 57.5% and 127%, respectively, while lending to non-residents declined to 13.4% (down from an average of 22.8%), which accounted for 23% of total loans. Due to strong credit growth, the share of non-performing loans dropped to 3% in May from 4.6% a year earlier. Deposit growth was moderate at 5.7% in May, following 6% in April and 5.9% in the first quarter. On average, corporate deposits decreased by 0.2%, whereas household deposits rose by 15.2%. Deposits from financial institutions increased by 31.7%, while non-resident deposits dropped by 5.6%, making up 21.4% of total deposits in May compared to 25.2% in May 2024.

Fiscal sector

Budget revenues grew by 0.8% but fell 2% short of the planned targets in the first five months of 2025, the EC noted.

“Part of the reason is a decline in pension contributions (-36.4%), which were 13.7% below target,” the report stated.

Furthermore, tax revenues rose by 10.8% exceeding the plan by 1.8%. Revenues from VAT and excise taxes increased by 12% and 8.2%, respectively. The positive economic performance led to significant growth in corporate profit tax (+46.3%). Budget expenditures increased by 8.1%, but were 6.8% under plan due to a 15% decline in capital expenditure, which was 34% below the target.

“The growth of primary expenditures (+12.8%) and interest payments (+37.5%) accounted for 0.6% of projected GDP, arriving at a surplus of 3.5%. By the first quarter of 2025, public debt decreased to 56.9% of GDP, down from 61.3% at the end of 2024,” the report stated.

Data on public debt for the first quarter did not encompass a record issuance of EUR 850 million (approximately 10.7% of GDP in 2025), conducted by Montenegro at the end of March, with a maturity of 4.875 years and an interest rate of 4.875%. The proceeds are designated for refinancing over 800 million euros’ worth of maturing debts due in 2025. As of the end of March, state deposits, including gold, totaled EUR 300 million or 3.8% of GDP, according to the report.