Thewesternbalkans
The office the World bank made an assessment about the Albania’s macroeconomic developments in 2023. The main conclusions are as follow:
- After a strong rebound in 2022, GDP growth is going to moderate but remain above the historical average.
- The labor market has improved, with employment and labor force participation increasing, and real wage growth slowing.
- Inflation continued its downward trend, but pressures from domestic demand remain elevated.
- External balances are expected to improve on account of expanding foreign tourism.
- Albania is expected to show a positive primary balance in 2023.
The Report sad that following a strong performance in 2022, economic growth started to moderate early in 2023 due to a slowdown in global demand, which adversely affected Albania’s industrial output. In Q1 2023, GDP grew by 2.7 percent. Services, including trade and real estate activity, contributed 2.5 percentage points to quarterly GDP growth, followed by construction and manufacturing, while extractive industries and agriculture contracted.
On the demand side, private consumption remained the main driver, following growth of 6.9 percent in 2022 vis-а-vis a negative contribution from public consumption.
Private consumption grew by 3 percent in Q1 2023, supported by increasing employment and wages, strong consumer confidence, relatively low interest rates and benign credit conditions, despite of monetary policy normalization. Gross Fixed Capital Formation (GFCF) grew by 7 percent in Q1 2023, reflecting higher public investment compared with Q1 2022, but weaker private sector construction activity. Net exports of goods and services adversely affected GDP growth: consumption growth supported an increase in demand for imports in Q1 2023, which outpaced export growth. Leading economic indicators suggest GDP growth accelerated during Q2 and Q3 2023, with construction accelerating and tourist arrivals hitting a record high in July. Increased income from employment, credit growth, business and consumer sentiment indicators, and strong tax revenues, suggest an increasing contribution to growth from consumption, investment and net exports in Q2 and Q3.
Employment grew by 2.7 percent yoy during Q2 2023. Increasing nominal wages and employment incentivized labor force participation (ages 15+), which continued to increase in line with previous years’ trends, reaching 63.9 percent in Q2 2023—the highest level since 2019. Average private sector wage growth reached 9.5 percent in Q1 2023, down from 14.2 percent in Q4 2022, mainly driven by wage increases in trade, transport, accommodation, and public administration.
In real terms, wages increase by 3 percent in Q1 compared with 6.3 percent in Q4 2022.
Unemployment reached 10.7 percent in Q2 2023, slightly higher than the end-2022 rate.
Inflation significantly reduced compared with its peak in 2022. The annual inflation rate dropped to 4.0 percent in August 2023 from a record high of 8.3 percent in October 2022, as a result of downward ressures from lower import prices, domestic currency appreciation, and monetary policy normalization. Upward pressure on inflation included wage increases and high-capacity utilization that kept production costs high.
Unprocessed foods contributed most to the increase in inflation, alongside increases in the price of services. Reflecting demand pressures, core inflation averaged 5.5 percent in Q2 2023, down from 8 percent in Q1 2023. In contrast, non-core inflation reached 2.8 percent in Q2, gradually converging to the pre-war average. In 2023 the appreciation trend, which has been accelerating since 2021, has continued, with the exchange rate appreciating by 12.1 percent in July 2023. The trend reflects the gradual reduction in the current account deficit (CAD) and an improvement of external balances as a result of growing services exports. On account of domestic currency appreciation, monetary policy normalization was slower than expected; the central bank’s policy rate stood at 3 percent in August 2023, and has remained at this level since the last policy rate increase in March 2023.
The WB outlined following risks in 2024:
GDP growth is expected to moderate to 3.6 percent in 2023, in the context of tight global financial conditions and limited economic growth in Europe. Nevertheless, increased tourism and construction are expected to drive exports, consumption and investment growth at rates similar to the prepandemic period.
Overall, the contribution to growth from investment is expected to decelerate, given the very high base effect and the completion of programs for post-earthquake reconstruction. The inflation rate is projected to start converging toward the 3 percent target by 2024.
The primary balance is projected to reach 0.1 percent of GDP in 2023 and stay positive in observance of the fiscal rule.
Fiscal consolidation is expected from the spending side. On revenues, the Government plans to introduce further tax policy measures, as envisioned in the Medium-Term Revenue Strategy. Public debt is expected to continue to decline over the medium term, as a result of higher nominal growth and a gradual improvement of the primary balance. Given Albania’s growing reliance on external financing, the exchange rate, interest rate, and refinancing related risks remain elevated.
Further increases in food and energy prices are a key risk to growth, as they could affect real disposable income, slow poverty reduction, and potentially constrain the fiscal space. As a small, open economy, Albania is highly exposed to external shocks, such as recession in Europe or further tightening of financing conditions in international capital markets beyond the current year.
Domestic risks emanate from natural disasters, public-private partnerships, and state-owned enterprises, in addition to fiscal risks stemming from the country’s hydropowerbased energy sector that are mainly due to variations in hydrology.
Comments: The World Bank examines Albania’s economy in 2023 and the main risks for 2024 in the light of global events without, however, explicitly naming any of them. In general, the country has successfully recovered from the pandemic, as well as managed to withstand shocks coming from outside, regardless of the open nature of its economy. It is important to note that thanks to the Stabilization and Association Agreement with the EU, Albania has managed to protect the economic its development regardless of the powerful impact of other external factors and especially the war in Ukraine.
