Western Balkans Growth Slows as Labour Shortages Deepen, World Bank Urges Urgent Workforce Reforms

The report highlights how external shocks—including the ripple effects of conflict in the Middle East and persistent inflation—are amplifying internal vulnerabilities.

Economic growth across the Western Balkans is set to remain under pressure over the next two years, as global instability, inflation, and structural labour challenges weigh on the region's outlook, according to a new World Bank Group report released today.

The Western Balkans Regular Economic Report projects that combined growth across Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia will reach 2.8% in 2026, a downward revision of 0.3 percentage points from earlier forecasts. Growth is expected to recover only modestly to 3.2% in 2027, underscoring the fragility of the region's economic trajectory.

Global Pressures Meet Structural Weaknesses

The report highlights how external shocks—including the ripple effects of conflict in the Middle East and persistent inflation—are amplifying internal vulnerabilities. Rising prices continue to erode household purchasing power, while uncertainty is dampening investment and slowing reform momentum.

"Global uncertainty and geopolitical tensions are holding back growth in the Western Balkans, and rising prices are hitting people's wallets directly," said Xiaoqing Yu, World Bank Division Director for the region.

While governments have deployed short-term fiscal measures to cushion households and businesses, the report warns that these interventions alone will not be enough to sustain long-term growth.

Labour Shortages in a Region with Untapped Talent

A central paradox defines the Western Balkans labour market: critical labour shortages coexist with large numbers of people outside the workforce.

On one hand, key sectors—from construction to services—are struggling to find workers. On the other, millions remain economically inactive, including women, young people, and discouraged jobseekers who have stopped looking for work altogether.

The report identifies this untapped human capital as the region's most immediate opportunity for growth.

If labour force participation rates were aligned with those of comparable European Union countries, the Western Balkans could unlock more than 2.8 million additional workers—a shift that would significantly ease labour constraints and boost productivity.

Demographic Pressures Intensify the Challenge

The urgency of reform is heightened by rapid demographic change. The region is ageing faster than almost any other part of Europe, with projections indicating that at least 20% of the population will be over 65 within the next decade.

At the same time, outward migration continues to drain the workforce, as both highly skilled graduates and manual workers seek better opportunities abroad. This dual pressure—ageing at home and emigration abroad—is shrinking the available labour pool and constraining economic potential.

Women's Employment a Key Growth Lever

Among the most significant opportunities identified in the report is increasing female participation in the workforce.

Currently, women in the Western Balkans face multiple barriers to employment, including limited access to childcare, cultural norms, and restrictive policy frameworks. Addressing these barriers could deliver immediate economic gains.

The report estimates that bringing more women into employment alone could add around 0.35 percentage points to annual GDP growth, making it one of the most impactful policy levers available.

Policy Barriers Discouraging Work

A critical issue highlighted is the structure of tax and social benefit systems, which in many cases discourage formal employment.

In several countries, individuals who report even minimal labour income risk losing access to poverty-targeted benefits. This creates a "welfare trap," where taking up work can leave households financially worse off.

As a result, employment becomes a risk rather than an incentive—particularly for low-income individuals and families.

Building a More Inclusive Labour Market

To address these challenges, the World Bank calls for a comprehensive policy shift focused on making work more accessible, attractive, and sustainable.

Key recommendations include:

• Reforming tax and benefit systems to ensure that work pays

• Expanding access to affordable childcare and eldercare services

• Investing in skills development and job training programmes aligned with market needs

• Promoting flexible work arrangements, including for digital and platform-based jobs

• Improving working conditions and job quality to retain talent

These reforms aim not only to increase participation but also to improve productivity and long-term economic resilience.

A Narrow Window for Reform

With growth slowing and demographic pressures mounting, the report warns that the Western Balkans faces a narrowing window to act. Failure to mobilise its inactive workforce could entrench labour shortages and limit future development.

"The key to long-term economic progress is jobs," Xiaoqing Yu emphasised. "Bringing more people into the workforce is one of the most effective steps the region can take to strengthen its economy."

Outlook: Modest Recovery, Conditional on Reform

While a modest recovery is expected in 2027, the pace and sustainability of growth will depend heavily on the region's ability to implement structural reforms—particularly in labour markets.

As governments navigate a complex global environment, the challenge will be balancing immediate economic pressures with long-term transformation.

The message from the World Bank is clear: unlocking the region's hidden workforce may be the single most powerful tool for driving growth, resilience, and prosperity in the Western Balkans.