A new report by the European Commission reveals that the economic growth of the Western Balkan countries slowed significantly at the beginning of 2025. Average GDP growth fell to 2.3 percent, compared to 3.3 percent in the previous quarter.

Montenegro stands out in particular, as it currently records the highest inflation in the region, while its foreign exchange reserves and fiscal stability are weakening, writes Biznis.ba.

Serbia slowed the region’s growth the most

Serbia recorded the sharpest decline, from 3.3 to just two percent growth in output. This means that Belgrade pulled the region’s overall results downward the most. Despite this, countries such as Albania, Kosovo, and North Macedonia maintained positive rates above three percent, showing somewhat greater resilience.

Consumption and wages: A double-edged sword

Domestic demand remains the main driver of growth. Wages continued to rise, which also increased household consumption. However, higher imports compared to exports had a negative impact on GDP, and the inflow of foreign direct investment also weakened, especially in Serbia and North Macedonia.

Inflation in the Balkans is rising again

Average inflation in the region in the first three months of 2025 rose to 3.7 percent. In the second quarter, it ranged from 2.3 percent in Albania to as much as 4.3 percent in Montenegro, which is the highest price increase in the region. Although still in single digits, inflation continues to create serious pressure on citizens’ living standards and the state budget.

The unemployment rate fell to historically low levels, although it is still higher than in the European Union. However, employment has almost come to a standstill. In the first three months, new jobs grew at a rate of only 0.2 percent, showing signs of labor market saturation.

Almost all countries in the region, except North Macedonia, are recording a deterioration in public finances. Revenues are rising, but expenditures are rising even faster. Especially in Serbia and Kosovo, the state has significantly increased capital investments, which is placing an additional burden on budgets.

The Balkan economy is often like a train traveling on one track toward the European Union, and on the other toward its own structural problems. The latest data only confirm that growth is becoming scarcer, while pressures on living standards and public finances are increasing.

A small and tourism-oriented economy like Montenegro’s fluctuates additionally due to its dependence on tourism and imports. As soon as food and energy prices rise or tourism underperforms, inflation immediately increases, which is now clearly visible in the data.

Unlike European Union member states that are only entering a phase of gradual slowdown, the Western Balkans are already feeling the stronger consequences of the global cooling of the economy. This means that the blow to consumption and loans may only just be arriving.

Ever since the global financial crisis of 2008, the region has shown greater sensitivity to external shocks than the more stable EU members. A similar scenario is repeating itself now.

If inflation continues to rise, central banks in the region could be forced into another interest rate increase. This would make loans more expensive for citizens and businesses, and thus further slow growth. The greater risk, however, lies in public finances, because most Balkan countries largely finance public spending with loans.