ECONOMIC ACTIVITY Slight recovery in the second quarter of 2025, inflation back in focus and service price increases

(Patria) - Economic activity in Bosnia and Herzegovina during the first half of 2025 shows mixed signals, with slower growth in the first and a slight recovery
in the second quarter.

Specifically, the first quarter of 2025 brought slower GDP growth (1.7% year-on-year) compared to the five-year average of 2.7%. Although all GDP components recorded growth, key drivers, in the form of private consumption and investment, showed significantly weaker dynamics. Private consumption increased by 1.7% compared to the same period last year, while investment activity slowed to 5.5%, which is a multiple times lower growth rate compared to the same quarter of the previous year when investments recorded a significant growth of 18.5%. Additionally, government spending recorded a growth of 1.6%, which is among the lowest post-COVID rates.

“The slowdown in the first quarter of 2025 is primarily visible through the parameters
of foreign trade. Specifically, goods exports recorded marginal annual growth of 0.4%, while imports increased by 1.6%, resulting in an increase in the trade deficit by 5.2% annually. This dynamic negatively affected the overall GDP, along with the decline in key industrial sectors, where manufacturing industry recorded an annual decline of 5.3%, and electricity production a decline of 2.5% annually. At the same time, the trade segment recorded an annual decline of 1.7%, reflecting reduced consumption and political uncertainty in BiH. Finally, the construction sector also showed weakness, with an annual decline of 0.8%, due to delays in public infrastructure projects and
reduced private investments.

On the other hand, service sectors showed resilience and growth: tourism increased by 11.8%,
administrative services by 10.6%, professional and technical activities by 6.9%, the IT sector by 6.5%, while the transport and storage segment increased by 5.3% annually. These sectors not only cushioned the decline in traditional industries but also indicate a gradual shift towards a knowledge- and service-based economy,” stated analysts from the Research, Strategy, and ESG Management sector of Raiffeisen Bank in Bosnia and Herzegovina.

After a below-average first quarter, indicators from the second quarter of 2025 indicate a slight economic acceleration. This is evident in the fact that goods exports increased by 4.7% annually, exceeding import growth of 3.5%, although the trade deficit increased by 2.7%. Additionally, industrial production in June increased by 2.6% annually, resulting in overall growth of 0.6% in the second quarter of 2025. It is particularly significant that the manufacturing industry recorded growth in two consecutive months, indicating a possible reversal of negative trends from the first part of the year. The retail sales index showed signs of recovery in May (1.1%) and June (4.6%), after four months of decline, bringing the cumulative index for the first half of the year to -0.6% compared to the previous year.

However, the negative side of economic activity in the second quarter of 2025 is the fact that inflation is once again coming into focus. After slowing down in 2024, when BiH recorded the lowest inflation rates in the region, an acceleration of inflationary pressures occurred as early as the beginning of 2025, culminating in June 2025 when the inflation rate reached 4.6% annually, while the average inflation in the first half of the year was 3.6%. Inflationary pressures were further intensified by a significant increase in the minimum wage in FBiH and RS, which affected expectations and business costs.

The largest price increases were recorded in the categories of food (8.5%), health services
(6.5%), restaurants and hotels (6.3%), and recreation and culture (3.8%). On the other hand, prices of clothing and footwear fell by 8.5%, while transport costs decreased by 3.4%, influenced by global prices of oil and petroleum products. Due to stronger inflationary pressures than expected, the inflation projection for 2025 has been revised from 3.5% to 3.9%, with an expected decrease to 2.7% in 2026 and 2.3% in 2027.

The biggest risks remain related to wage movements, electricity price adjustments in BiH
and global raw material prices.

Considering the economic trends in the first two quarters of 2025, the revised GDP growth forecast for the entire year 2025 is a moderate growth of 2.5% annually, while medium-term growth dynamics are estimated at an average of 3.2% annually.

Recovery is expected through consumption stabilization, driven by wage and credit growth, followed by continued investments in the energy sector and digitalization, and growth in service exports, especially in IT and tourism. Bosnia and Herzegovina still faces challenges on the path to further EU integration. Although the country gained candidate status in 2022 and a green light for accession negotiations in March 2024, delays in adopting the Reform Agenda have led to BiH not being among the countries that received pre-financing from the Western Balkans Growth Plan. BiH adopted only the draft Reform Agenda in June 2025, and due to the non-adoption of this document, BiH lost 10% of the available funds from the Growth Plan. The total available funds until 2027 amount to EUR 976.6 million for
BiH, but further delays could lead to additional cuts. The European Commission has clearly indicated that actual reforms are key to accessing EU funds.

By the end of September 2025, BiH should adopt the final version of the Reform Agenda, appoint the chief negotiator for accession negotiations with the EU, and adopt two key laws within the scope of the functioning of the judiciary in BiH. Otherwise, BiH risks further loss of funds and stagnation in integration, while some countries in the region are experiencing accelerated movement towards the EU (Albania and Montenegro).

“In the coming months, Bosnia and Herzegovina has the opportunity to return to the path of reforms, open accession negotiations, and utilize financial incentives to accelerate economic development. Political consensus remains crucial, and institutional stability is key for long-term progress,” state the analysts of Raiffeisen Bank in Bosnia and Herzegovina.