Kosovo Watch: Sluggish Q3 growth and diminished rebound hopes in near future

The slowdown of Kosovo's economy became clearer in Q3 2022, as the yearly GDP growth remained at the same low level denoted in Q2 2022 at 2.1%, lower than our forecast of 3.0%. In addition to the persistent high inflationary pressures, the ongoing energy crisis is becoming a real challenge for the small economy of Kosovo, and it's impacting its ability to reach the potential growth rate.

Looking at the GDP components, private consumption and export of goods and services were the main source of the subdued growth. However, private consumption — the largest component of GDP in Kosovo — grew marginally by only 3.0% yoy, impacted by high inflation rates that have diminished the ability of individuals and the Diaspora to keep the purchasing power intact. Meanwhile, exports of goods and services increased moderately by 6.0% yoy (versus 145% yoy in Q3 2021) mainly due to the base effect. Even public consumption, with only 0.5% yoy growth couldn’t help the economy overcome the decelerated rate of the other components. Moreover, gross fixed capital formation posted a decline of 2.3% yoy. This is another proof that confirms hesitation by the private sector towards investments in the presence of high uncertainty stemming from the new geopolitical scenario in Europe and its consequences for the local economy. On the other side, imports of goods and services increased by 3.9%, affected negatively by the imports of goods (with a negative growth of -1.4%), pointing to a slowdown of the domestic demand for imported goods, mostly due to the unrelenting jump in prices of imported goods, which reached 17.5% on average in Q3 2022 (somehow lower than the maximum of 23.3% in Q2 2022). The impact of such a bounce is expected to be felt in the following quarters too.

All sectors of the economy, except construction and public administration, experienced growth in Q3 2022. It should be noted however, that the main sectors of economy i.e., trade, industry, and agriculture marked low to moderate real growth rates. Hence, trade expanded by 4.3% yoy, while industry and agriculture grew by only 2.2% yoy. Service sectors such as financial industry, professional and scientific activities, IT, communication and leisure activities increased by 12.7%, 8.6%, 8.2% and 7.5% respectively, but each of these sectors contribute for only a small part in the GDP structure. Construction, with a decline of 7.8%, in line with the negative growth rate of gross capital formation, was impacted negatively by the significant increase of construction costs. In fact, the construction cost index was up 19.5% yoy in Q3 2022, with pronounced cost increases in energy, transport, construction materials and machinery.

Inflation, has entered a downward trajectory although it remains high. After peaking at 14.2% in July 2022, the inflation rate started to steadily drop in the following months. November’s print was 11.6%, down from 12.7% a month earlier. Nevertheless, food prices, energy and transport costs, the main components of household expenditures, remain high with respective annual increase of 17.9%, 13.5% and 10.5%, respectively, in November. These increases are significantly impacting the purchasing power of the individuals, the confidence levels and their financial situation. Nevertheless, there are some positive signs stemming from core inflation which has started to lean lower from 5.8% in June, the highest level of the year, to 2.9% in October, impacted also by reduced domestic demand. In 2022, the government intends to support the economy with circa Eur 150 mn by helping households handle the increased prices of basic goods. We expect inflation to close the year at a rate of 11.2%, while next year our forecast is for a decline to an average of 5.8% yoy, as the global price dynamics are expected to be less impactful and still relatively high, prices will knock — at least partially — the aggregate demand.

To sum up, with the GDP growth of 2.1% in Q3 2022 and our expectations for an even harder Q4, due to the ongoing energy crisis and elevated prices, we have downgraded our full year 2022 real GDP growth forecast to 2.7% from 3.5% previously. At the moment we are keeping our GDP growth projection of 2.9% in 2023 due to the relatively high inflation and energy crunch in the first part of the year.