The recent base rate hike signals ongoing inflation challenges due to domestic inflationary pressures, while difficulties remain in achieving the inflation target. BoA’s recent announcement of a 25bps increase brings the base rate to 3.25%. Geopolitical tensions, like the recent Israel-Hamas conflict, add uncertainty and potential risks to the inflation target. We foresee 2023 inflation at circa 4.8% yoy on average, with a projected base rate of 4.25% by year-end 2024. Tightening measures remain in play, closer to the estimated neutral rate of 4.25%-4.50%.
Europe transforms, tensions simmer in the Balkans. Kosovo and Serbia negotiate, complexities unfold. Russia looms, Europe shifts. Challenges persist, but progress bypasses treaties. Innovative ideas propose gradual accession, extended benefits. Unravel with us Europe’s puzzle: the future of EU expansion.
A surprising underperformance in Q2 2023 despite positive high-frequency indicators. The Economic Sentiment Indicator (ESI) reached its highest historical level, yet quarterly figures point to a sluggish performance. Construction and real estate sectors fueled GDP growth. However, exports faced a decline of 1.5% yoy, indicating challenges in the goods sector due to reduced external demand and currency appreciation.
The simmering tensions in Northern Kosovo have reached a boiling point, as evidence emerges of local Serbian involvement in orchestrating the recent unrest. Meanwhile, Belgrade has consistently portrayed the clashes as a spontaneous response by local Serbs to perceived repression. However, the mounting evidence challenges this narrative, leaving Belgrade in a precarious position.
The situation is further complicated by the inflexible approach of Prime Minister Kurti, who insists on full recognition of Kosovo as a prerequisite for negotiations. This impasse has led to a prolonged stalemate, with potential spill-over effects into neighboring countries such as Bosnia and Herzegovina and Montenegro. The region finds itself at a critical juncture, with the Kremlin seeking to exploit Serbia’s influence to undermine Europe’s defenses.
Brussels and Washington, recognizing the necessity of maintaining a positive relationship with Serbian President Vučić, tread carefully. However, Vučić’s position could be weakened by opposition and power struggles within Serbia, including figures like pro-Russian intelligence chief Aleksandar Vulin, who faces US sanctions. The European Union cannot afford to have a vacuum in the Balkans, providing an additional front for Putin’s influence.
As the Western Balkan countries inch closer to EU accession, the pressure to establish peaceful relations intensifies. The prospect of tangible EU membership may serve as a catalyst for resolving the entrenched stalemate and preventing further escalation. The region’s stability hangs in the balance, with unpredictable consequences for both the Balkans and the European Union.
Kosovo's economy took an unexpected twist in Q2 2023, with GDP growth falling short at 2.0% yoy. Inflation saw a rollercoaster ride, from decline to new pressures. Political instability and Serbia relations add to the complexity. Our 2023 GDP forecast is under review. Stay tuned as we delve deeper into these unfolding economic tales, dissecting the challenges and prospects that define Kosovo's economic journey in 2023.