North Macedonia’s economy has shown a mix of success and struggles as it approaches the second half of 2025. The country’s budget hole already reaches 2.5% of GDP for the first six months of the year. Projections indicate this gap may increase to 3.5% by 2026. The trajectory of inflation has been volatile and unpredictable. In April, it dropped to 2.6%. By July it shot back up to almost 5% y-o-y, then calmed down to 4.0% in September.
The economy is on track for a 3.2% year-over-year GDP growth rate in the first half of 2025. True enough, as the second quarter had the largest growth in three years at 3.4%. This impressive GDP growth can be almost completely explained by domestic drivers, particularly investment and household consumption. In other words, even excluding inventions, rackety capital investment growth supercharged the bottom line GDP growth by two percentage points. Meanwhile, final household consumption was up 3% YoY, adding another 2.4 pp’s to the headline growth in Q2.
However, despite these positive developments the external balance has worsened. The current account deficit is at 3.5% of GDP following the first half of the year. FDI plummeted, now amounting to 4.2% of GDP. This drop from 6.7% at the end of 2024 represents a significant loss of outside confidence in the economy.
Inflation dynamics further complicate the economic picture. Initially, inflation pressures resurfaced following a low return of 2.6% in April. By July, they were in full breakout mode, pushing up to near 5%, driven by underlying intractable core inflation that’s been supported by wage-based inflation channels. While the headline inflation number dropped to 4.0% YOY as of September, the underlying pressures are what keeps policymakers on edge.
The government is smartly reacting to these glaring economic indicators with defense moves. Despite proud claims in the budget draft for 2026 that a budget gap will continue to expand, the bleak fiscal reality looms even as leaders try to jumpstart growth. The annual growth rate for the year has been downgraded to 3.1% YoY. We believe this amendment is an appropriate response given the uncertain times our nation faces with financial challenges ahead.
As Vox’s Jim Tankersley explains, analysts have been emphasizing how important domestic consumption has been for sustaining growth. To continue this momentum, we need to protect against inflation and external imbalances. The economy’s reliance on domestic factors for growth places additional pressure on policymakers to ensure sustainable economic practices and bolster investor confidence.