Analysis for Q1 2025: Inflation accelerates, retail sales decline, employment drops, and politics further complicates matters

(Patria) - The economy of Bosnia and Herzegovina achieved a solid economic result in 2024, measured by gross domestic product growth, which increased by a real 2.5% compared to the previous year, despite a series of challenges the country faced during the year. Key challenges include the weak recovery of demand for Bosnian export products from Eurozone countries, the October floods that caused human casualties and significant material damage, and disrupted the key railway line to the port of Ploče in Croatia, all accompanied by a worsening political situation and a standstill on the EU integration path, according to an analysis by the Research, Strategy and ESG Management sector of Raiffeisen Bank in Bosnia and Herzegovina.

"As many times before, final consumption is one of the drivers of growth, as the share of this component in total GDP is at 83%, recording a real annual growth of 2.1%, equivalent to a real value of 760 million BAM. Nevertheless, the most significant positive dimension of economic activity in Bosnia and Herzegovina in 2024 is the growth of investments by 13.6% (+1.45 billion BAM), which is an encouraging sign and a solid foundation for future economic development.

As usual, a negative impact on GDP movement comes from foreign trade, where Bosnia and Herzegovina still records a significant trade deficit (2024: 12.58 billion BAM) and an unfavorable growth dynamics of trade components, with imports increasing by 3.2% and exports decreasing by 3.7% on an annual basis in 2024. The negative trend in goods foreign trade was partially mitigated by growth in service exports, such as tourism (9.6%) and IT services (6.6%), along with traditionally growing remittances from abroad (9.2%) and an increased volume of foreign direct investments (12.1%).

In addition, it should be noted that in 2024, Bosnia and Herzegovina was among the countries with the lowest average inflation (1.7%), while, for example, countries in the region were mostly above the 2% level (Croatia, Serbia, Montenegro, North Macedonia, and Albania)," stated analysts from the Research, Strategy and ESG Management sector of Raiffeisen Bank in Bosnia and Herzegovina.

However, the first quarter of 2025 brings certain changes, with a positive step forward in foreign trade through export growth of 6.9%, which, after a longer period, is a higher growth rate compared to import dynamics (5.5%), indicating a recovery in demand for Bosnian products from the EU (5.2%) and CEFTA countries (13.4%), serving as a basis for a positive forecast for the further development of this GDP segment.

On the other hand, other macroeconomic indicators record certain negative shifts, with inflation significantly accelerating (3.3%), retail trade turnover dynamics sinking into negative territory (-2.9%), industrial production remaining in negative territory (-2.5%), while the labor market showed a certain decrease in the number of employed compared to the end of 2024, partly due to cyclical movements in the labor market and partly as a result of the increase in the minimum wage to 1,000 BAM.

"These trends obviously pose challenges to the economic resilience of Bosnia and Herzegovina, but we believe that stabilization will occur in the remaining part of the current year through a recovery in retail sales. Industrial production should feel the benefits of export growth, while the labor market needs a certain period for stabilization after legislative changes in that area. Specifically, in 2025, we expect further gradual economic recovery with real GDP growth of 2.7% annually, driven by private consumption, investments, and improvement in the export component. In this regard, a mild recovery in industrial production and exports is forecast after a year and a half of negative recessionary trends, along with a slight growth in retail trade turnover of 3% annually, supported by further growth in average wages of 10% and further growth in household lending of 8%. Additionally, a continued stable contribution from the service sector, linked to the growing tourism segment, is expected. At the same time, we expect price pressures to extend throughout the current year, primarily through the food and services segments. There are also certain announcements that further corrections in electricity and water prices could occur, which would certainly push the consumer price level above the 2% considered economically acceptable (inflation projection for 2025 is 3% on average).

A particularity of the upcoming period is the expected increased interest in investments in green energy, energy efficiency, and digitalization by export-oriented and large domestic companies, due to the impact and alignment with new EU ESG regulations. In this regard, the energy sector of Bosnia and Herzegovina should be emphasized as a strategic sector of the economy, playing a key role in the transition to renewable sources. By signing the Sofia Declaration, Bosnia and Herzegovina committed to decarbonizing the energy sector by 2050, under conditions where the country's energy balance still largely depends on thermal power plants. Significant investments are planned in renewable energy projects (solar, wind farms, hydroelectric plants, biomass, etc.), along with investments in optimizing the operation of thermal power units during the transition period.

"Finally, Bosnia and Herzegovina faces a very challenging period of resolving the political deadlock, which is primarily manifested through the parliamentary crisis and stagnation on the EU integration path. Certainly, the adoption of the remaining two EU laws, the appointment of the chief negotiator for the EU accession negotiation process, and the formal start of negotiations with the EU would be a tailwind for further economic development, the investment climate, and the credit rating of Bosnia and Herzegovina. The economic aspect of further progress on the EU integration path would be particularly visible through the adoption of the BiH Reform Agenda, which is a prerequisite for participation in the Growth Plan for the Western Balkans, worth 6 billion EUR, offering financial incentives to accelerate reforms, with Bosnia and Herzegovina potentially counting on 1.5 billion EUR from the said Plan," state analysts from Raiffeisen Bank in Bosnia and Herzegovina.