Exigencias básicas de ahorro de energía (HE).

3.4.1

Recent macroeconomic developments

After a moderate output decline by 0.9% in 2009, economic activity appears to have accelerated by 0.7% in 2010, mainly based on improved export growth, which benefitted from increased demand for metal products. Thanks to higher export revenues and sustained inflows of private transfers, the current account deficit dropped to 2.8% of GDP by the end of 2010. Inflation started to accelerate during the year, mainly driven by rising prices for imported energy. As a result, year-on-year consumer price inflation reached 3% in December 2010, bringing annual average inflation to 1.6% in 2010, compared to -0.8% on average in 2009. The recovery of economic activity also helped to improve tax revenues, which rose by 2.8% in 2010, compared to a decline by 7.4% the year before. Expenditure rose by 2.4% only, which together with nominal GDP growth by 3.6% helped to slightly reduce the central government deficit, from 2.7% of GDP in 2009 to 2.5% in 2010. The labour market remained largely unchanged in 2010. Employment rose by 1.3%, mainly due to strong job growth in the last quarter of 2010. Increased labour inspection probably also contributed to the increase in registered labour.

3.4.2

Medium-term macroeconomic scenario

Against the background of a rather moderate growth in the country's main export markets, the medium-term macroeconomic scenario expects a marked acceleration of GDP growth, from 2% in 2010 to 5.5% in 2013. This growth performance would be significantly above historic trend growth. The main driving forces are domestic components in particular investment and private consumption, increasing during the programme period on average by some 10% and 3% respectively. Exports are expected to increase by some 7½%, while import growth is forecast to remain rather moderate at some 7¾% on average. Inflation is expected to accelerate to some 3%, while the unemployment rate is projected to decline by about 1 percentage point each year, reaching 27.6% in 2013. As a result of strong export growth and the expected stability of high inflows of private transfers, the current account deficit , though almost doubling, is forecast to remain rather low, increasing from -2¾% of GDP for 2010 to -6¼% in 2013.

Overall, this growth profile appears optimistic but feasible in 2011. However, towards the end of the programme period the programme looks increasingly optimistic, in particular as the expected strong increase in domestic demand is likely to also trigger a significant increase in imports, dampening growth and increasing the external imbalances.

COM PEP COM PEP COM PEP COM PEP COM PEP

Real GDP (% change) -0.9 -0.9 1.3 2.0 2.2 3.5 2.5 4.5 n.a. 5.5

Contributions:

- Final domestic demand -4.0 -4.0 -0.3 -2.0 3.1 3.9 3.9 5.2 n.a. 6.5

- Change in inventories 0.0 n.a 0.0 n.a 0.0 n.a 0.0 n.a n.a. n.a

- External balance of goods and services 3.1 3.1 1.6 4.0 -1.0 -0.4 -1.4 -0.7 n.a. -1.0

Employment (% change) 3.4 3.4 1.0 0.4 2.0 3.0 2.5 3.0 n.a. 4.0

Unemployment rate (%) 32.2 32.2 31.9 32.0 31.1 30.6 30.0 29.4 n.a. 27.6

GDP deflator (% change) 0.3 0.3 1.9 2.0 3.3 3.0 3.4 3.0 n.a. 3.0

CPI inflation (%) -0.8 -0.8 1.7 1.6 2.3 3.0 2.5 3.0 n.a. 3.0

Current account balance (% of GDP) -6.7 -6.7 -3.3 -3.6 -4.1 -4.3 -5.3 -5.7 n.a. -6.3

Sources: Pre-Accession Economic Programme (PEP) 2011, Commission 2010 Autumn Forecast (COM)

Table II.2.2:

2009 2010 2011 2012 2013

Comparison of macroeconomic developments and forecasts

Real wage growth per employee is expected to have been 2% in 2010 and to drop to 0.5% in 2011 and to increase again to 1.5% in the remaining programme period.

Real sector

Like in the previous programme, the medium-term scenario expects a rather broad based economic recovery, mainly driven by increased investment and to a lesser extent private consumption, but also supported by external demand. Overall, GDP growth was forecasted to reach 2% in 2010 and to accelerate continuously towards 5.5% by 2013. Employment is expected to increase by some 3-4% annually, which should help to support consumption driven growth. Investment growth was expected to drop by 7% in 2010 but to accelerate from 8.5% in 2011 to 12.5% in 2013. Due to strong employment increases of some 3-4% annually during the programme period, unemployment is expected to drop significantly, from 32% in 2010 to 27.6% in 2013. Compared to the Commission's autumn forecast, the PEP framework expects a consistently slightly more favourable development of the country's demand components. In particular in 2012, the last year where Commission estimates are available, the country's GDP growth expectations are 2 percentage points above the Commission's estimates, resulting from stronger growth of both, domestic but also external demand.

Inflation

Consumer price inflation is forecast to remain rather moderate, increasing from 1.6% in 2010 to a stable 3% in the remaining programme period. The programme's estimates for the CPI are higher than the Commission's autumn forecast, which might be related to the programme's the stronger underlying economic growth. However, overall, the CPI's profile seems not to fully reflect the dynamics of import prices and domestic food prices, as described in the programme. In particular in 2013, the programme's expectation of largely unchanged inflationary pressures appears optimistic, given the programme's expectation of GDP growth substantially above potential. The programme's assumptions on world import prices expect a decline of import prices in 2012, which is significantly lower than the Commission's assumptions and which might partly explain the rather low inflationary pressures that are expected despite strong GDP growth. Overall, the programme's price

scenario looks rather benign, given expectations of GDP growth significantly above the authorities' potential growth estimates.

Monetary and exchange rate policy

The monetary framework underlines price stability as the overarching monetary policy objective. To this end, the central bank maintains a de-facto fixed peg of the denar towards the euro. In view of the high share of euro-denominated imports (some 60% of total imports) this helps to contain price pressures through imports. The peg to the euro also contributes to curtail balance sheet risks as a large share of assets and liabilities and denominated in euro. No changes to the current exchange rate regime are envisaged. Overall, the monetary framework is in line with the programme's objective of maintaining a nominally fixed exchange rate towards the euro.

External sector

The programme's external assumptions envisage a rather moderate recovery of the country's main export markets during the programme period, which is in line with the current view of most international institutions. However, expectations on export growth are significantly above expected growth of the country's main trading partners, at some 7-8½% annually, implying important gains in export market shares. At the same time, the programme envisages a rather modest increase in imports (at some 6-7.8% annually), in particular in view of rather strong domestic demand, especially investment which is likely to lead to large imports of capital goods. As a result, the envisaged rise in current account deficit remains moderate too, from expected -2.8% of GDP in 2010 to -6.3% in 2013. Compared to last year, the expected deterioration in the external balance appears more realistic. However, should the optimistic assumptions of the programme on sustained exports and moderate imports growth not materialise, the sustained growth profile in 2012-2013 would translate in a significantly higher current account deficit and additional external financing needs. The financing of the deficit appears to rely largely on FDI inflows and loans from International Financial Institutions. Important inflows of FDI, increasing from 3.6% of GDP in 2011 to 4.9% in 2013, appear to be a main financing factor. These expected FDI inflows are significantly higher than in most pre-crisis years. Unfortunately, the document does not provide much evidence on how such an increase will be achieved, except for a mention of further reforms in business environment.

As far as the risks to the macroeconomic scenario are concerned, the main downward risks are probably related to a sudden and substantial drop of private transfers, less buoyant investment or higher than anticipated import. Also inflationary pressures could increase faster than expected. Concerning upward risks, private consumption could pick up faster than forecasted, reflecting improved consumer confidence. Overall, given the presented scenario, downward risks are probably more pronounced.

Box: The labour market: A persistent challenge

The labour market situation was already precarious when the country became independent. As a result of the economic crisis in former Yugoslavia in the late 1980s, the country entered independence with an unemployment rate of slightly above 20%. The restructuring of the economy during the early 1990s led to a sharp increase in unemployment, as a low growth dynamics and the poor business environment failed to create a sufficient number of alternative job opportunities. In the second half of the 1990s, stronger growth helped to reduce the unemployment rate from 36% in 1995 to around 30% in 2001. However, the short recession of 2001 brought another steep rise in unemployment to 37% by 2005. The pre-crisis boom in 2006- 2008 helped to reduce the unemployment rate to some 34%, which however continued to decline to 32% in 2009-2010, despite the sharp deceleration in growth.

Unemployment rates and GDP growth

-10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20.0 22.0 24.0 26.0 28.0 30.0 32.0 34.0 36.0 38.0 40.0 GDP growth (lhs) Unemployment ratio (rhs)

Besides a relatively weak growth dynamics, job creation was further hampered by a high tax burden on registered labour and the lack of flexibility of the labour legislation to allow for part- time and fixed-term jobs. As a result, many unemployed sought income in the informal economy. In recent years, the legal, fiscal and institutional framework has improved. The labour law has been made flexible, the tax wedge on labour has been lowered, incentives have been created for registering so far informal employment and labour inspections have been increased. The employment agency, which after its establishment in 1997 mainly dealt with unemployment registration, has started to implement active labour market policies, like training and developing employment schemes.

However, a high share of youth unemployment, accounting for some 20% of total unemployed, unemployment rates of some 50% in this age group and a high share of long-term unemployment, with some 65% of total unemployed being unemployed for longer than 4 years, point to deeply entrenched structural weaknesses, such as an educational system failing to provide the required skills and a weak business climate, impeding the creation of jobs accessible and attractive for long-term unemployed.

Private transfers from abroad, amounting for up to 20% of GDP and informal employment are probably cushioning the social consequences of unemployment. However, structural unemployment and weak growth have led to a situation where nearly 1/3 of the population is considered to live below the poverty line.