European Commission projects Albanian economy to grow and inflation to fall

16 Maj 2023, 14:00Economy TEMA

Following stronger-than-expected growth in 2022, the pace of economic expansion is projected to slow down to about 3% in 2023 as tighter financing conditions dampen both private consumption and investment. Weaker growth in Albania’s main trade partners is set to contain export growth. Decelerating import prices and the continuing appreciation of the domestic currency are expected to help lower the inflation rate below 5% this year. In 2024, GDP growth is forecast to rebound to 3.8% while inflation is projected to moderate further. The fiscal deficit is set to fall to just above 2% of GDP while, following its sharp drop to 64.6% in 2022, the public debt ratio is forecast to decrease only gradually.

These were some of the conclusions of the European Commission Forecast report, Spring 2023 for Albania.

According to the report, Albanian economy grew by 4.8% last year driven by private consumption and investment. The exceptionally strong private consumption growth was boosted by increasing employment, real wages and social transfers. In addition, private investment, including high inflows of foreign direct investment, stimulated growth.T

The report also stated that a better-than-expected tourism season pushed up services exports, while goods exports, mainly of primary commodities, construction materials and textiles, benefited from price advantages. Strong domestic demand and elevated electricity import needs resulted in a large negative contribution of net exports to growth.

Although business sentiment has continuously improved since November across sectors, business lending started to fall at the end of 2022 and rising interest rates are projected to hold back private investment in 2023. Coupled with base effects and weak growth of public investment as post-2019 earthquake reconstruction is set to end, investment growth is expected to decline to 1.3% in 2023. Public consumption is projected to be subdued. Private consumption growth is forecast to decelerate but remain strong at above 3%, supported by increasing employment and wages, which should be boosted by announced raises in public and minimum wages.

Slowing domestic demand is projected to dampen import growth, while sluggish external demand is expected to weaken goods exports. However, service exports are expected to remain relatively unaffected by the slowing economic performance of trade partners, as Albania remains a relatively cheap and attractive tourist destination. Overall, supported by the expected resilience of household consumption, GDP growth is forecast at 2.9% in 2023, with net exports projected to have a neutral growth contribution. In 2024 output growth is forecast to rebound to 3.8% as the growth prospects ion is set to continue falling.

Moderate employment growth in 2023 and 2024 amid continuing mobilisation of inactive parts of the population is expected to gradually decrease the unemployment rate to about 10.3%. This outlook is subject to downside risks, mainly related to the vulnerability of the dominant rainfall-dependent hydroelectric production to weather conditions, more persistent than forecast inflationary pressures, and increasing shortages of skilled labour aggravated by emigration.

The report also states that public debt ratio has substantially fallen in 2022.

“The fiscal cost of subsidising regulated electricity prices in 2022 was largely compensated by savings on public investment and interest payments, while revenue growth was strong. Coupled with a large increase in nominal GDP, this helped lower the public debt ratio by almost 10 pps. to 64.6% in 2022. Supported by declining energy subsidies and one-off revenues, a positive primary balance is expected to be achieved by 2024 despite a planned increase in public wages. The fiscal deficit is set to stay around 2.2%, enabling a moderate pace of public debt reduction,” the European Commission report says.

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