The European Commission anticipates that the Montenegrin economy will grow by 3.8 percent this year, with a projected slowdown to three percent next year.

According to the latest spring forecasts, the Montenegrin economy experienced robust growth in 2023, driven by strong private consumption and a successful tourist season.

“Growth is expected to moderate over the period 2024-2025, with slower household consumption likely. Diminished external demand may affect tourism growth. The positive fiscal outcomes in 2023 were largely supported by a rise in consumer taxes and disposable income, although capital expenditures fell short of projections. Going forward, an increase in the budget deficit and a rising share of public debt relative to GDP is anticipated,” the forecasts for Montenegro state.

Based on quarterly estimates, real GDP growth in 2023 was approximately 6%. The European Commission noted that this growth was bolstered by a successful tourist season and significant increases in private consumption, attributable to substantial foreign inflows, rising wages and pensions, increased employment, and household borrowing.

“The growth in exports of goods and services outpaced import growth, leading to a positive net exports contribution to GDP growth, even as public spending remained moderate,” the report stated.

The EC highlighted that the current account deficit narrowed to 10.9% of GDP in 2023, owing to strong export growth. Surpluses in primary and secondary incomes were adversely impacted by broader EU economic slowdowns and a decline in remittances. The Commission expects a slight reduction in the current account deficit during 2024-2025, driven by positive tourism effects and restrained import growth due to more modest consumption patterns.

“The balance of risks skews negatively due to high financing costs and political uncertainties. A positive aspect is Montenegro’s participation in the EU Growth Plan for the Western Balkans, which aims to support investments in capital expenditure and productivity. Expected investment growth in 2024 may bolster credit activity, particularly in the corporate sector,” the EC notes.

Additionally, the strong tourist seasons and labor market measures implemented in late 2021 positively influenced job creation in 2023.

The unemployment rate fell to a record low of 13.4%. However, employment growth is expected to slow in the 2024-2025 period, reflecting a slowdown in production growth, resulting in an extremely low unemployment rate.

Anticipated Calming of Inflation

Inflation declined throughout 2023 and remained relatively stable during the first quarter of 2024. The EC expects consumer prices to rise at a slower rate in 2024 compared to 2023 due to reduced domestic inflationary pressures, including substantial increases in the minimum pension from January and ongoing salary and social transfer growth. The Commission forecasts further easing of inflation in 2025.

The budget for 2023 performed notably better than anticipated, according to the EC.

A surplus of 0.6% of GDP was recorded, driven by strong revenue growth and a shortfall in capital expenditure implementation.

“Higher revenue growth projections are supported by strong VAT and excise duty collections as well as various one-off measures, including economic citizenship programs and EU grants for energy sector support,” the EC report indicates.

The EC predicts that the budget deficit will increase in the future due to significant mandatory expenditure rises in 2024 and slower income growth amid declining consumption and the absence of extraordinary revenue items.

“Due to favorable fiscal results and strong nominal GDP growth, the public debt share in GDP fell by almost 10 percentage points in 2023, landing at 58.2%. Without fiscal consolidation, public debt is set to rise during 2024-2025, as nominal GDP growth slows down while debt servicing costs climb. Significant refinancing will be necessary for public debt in the upcoming years,” the EC concludes.