Sizeable economic growth on the back of high public spending
Economic growth is forecast at 3.3% in 2025, which is significantly higher than last year (2.8%). The driver of this acceleration is domestic demand, on the back on higher wages and pensions, but also public investment. The external sector is set to remain weak, mainly due to difficulties in the German automotive industry.
Fiscal policy supports economic growth in the short term but is problematic in the medium and long term. The budget deficit is forecast at 5% of GDP this year, well above the fiscal rule of 3%. Due to large deficits in the recent past, public debt lies currently above the fiscal rule of 60% of GDP. Thus, the country is in need of fiscal consolidation.
Consequently, the current model of growth supported by fiscal expansion is not feasible in the future. Instead, the country needs to focus on structural reforms and FDI attraction to promote growth. FDI flows were high last year (EUR 1.25 bn), showing that North Macedonia is an interesting partner for foreign companies. The German Economic Team will support the government in its effort to strengthen the business climate and FDI attraction.
Sizeable economic growth
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In 2025, external factors contribute negatively to growth, primarily due to weaker goods exports linked to the slowdown in the automotive industry in Germany and the EU. On the other hand, domestic factors are strong. Private consumption is supported by higher public sector wages and pensions, while public investment is set to rise, notably through infrastructure projects such as corridors 8 and 10d. Corridor 8 is an east-west motorway connecting the Adriatic and the Black Sea. Corridor 10d is a key component of the pan-European transport corridor 10 going from north to south. Overall, domestic factors outweigh external weaknesses. As a result, GDP is forecast to grow by 3.3%, which is a notable increase from 2.8% in 2024.
Increase of public deficit and debt
Higher public wages, pensions, and investment support GDP growth in the short term. However, this is accompanied by an increasing fiscal deficit. For 2025, the IMF projects a budget deficit of 5% of GDP, which is considered too high for an economy growing at 3.3%. In fact, North Macedonia faces a significant structural budget deficit. Since the COVID-19 pandemic, annual deficits consistently exceeded the fiscal rule of 3% of GDP each year.
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Fiscal consolidation is needed to stop this trend, and it must happen in the short-term. There is limited scope for additional large deficits, as public debt is projected to amount to 61.2% of GDP in 2025 and thus above the fiscal rule of 60% of GDP.
The expansionary fiscal policy contributes to economic growth in 2025, but the current growth model, based on fiscal expansion, is not sustainable in the medium term. Thus, structural reforms are needed to support economic growth going forward.
Elevated inflation, fixed exchange rate, rising wages
Inflation stood at 2.6% yoy in April 2025, which is relatively moderate. However, core inflation—excluding energy and food—was above 5%. Given the relatively high core inflation, which plays a more significant role in monetary policy decisions, there is currently no room for monetary policy easing. This is especially true as fiscal policy remains expansionary.
Inflation in North Macedonia must also be viewed in the context of the de facto peg of the denar to the euro. This exchange rate regime has proven successful in the past and is broadly supported by both businesses and the population. However, due to the peg, inflation should not diverge too far from that in the euro area, as this would lead to a real appreciation of the denar. Therefore, controlling inflation is not only about maintaining price stability but also about preserving competitiveness and the benefits of the euro peg.
In this context, wage developments play a major role. Wage levels in the country are considered adequate, but recent increases have been exceptionally strong.
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A mix of factors has contributed to these dynamics, including migration-related labour shortages. However, the minimum wage formula may also have played a role. The current formula is based not only on inflation but also on the average wage—which, in turn, is partly influenced by the minimum wage itself. This circular relationship may create a wage spiral and contribute to inflationary pressures.
Trade and FDI mainly with the EU
In 2024, foreign trade turnover in goods amounted to almost EUR 19 bn, or 122% of GDP, highlighting that North Macedonia is a very open economy. The country is strongly integrated with the EU, with 77% of its exports going to the EU and around half of its imports coming from the EU.
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The EU is also an important source of foreign direct investment (FDI), accounting for around two-thirds of the FDI stock in North Macedonia in 2023.
FDI is well diversified across sectors, with 23% of the stock in the financial and insurance sector, followed by the vehicles sector at 14% and trade at 13%. In 2024, North Macedonia recorded a historic high in FDI inflows, which amounted to EUR 1.25 bn. This strong performance signals growing investor confidence in the country.
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Outlook
Most economic indicators for 2025 look favourable. However, a more in-depth analysis raises questions about the underlying growth model. Currently, growth is strongly supported by fiscal expansion. This approach is not sustainable in the medium term, as the country has little to no fiscal space left to further increase public debt. To sustain and enhance growth, the implementation of structural reforms will be essential. The German Economic Team stands ready to support the government in this process.
