Kosovo Watch: Is the boom real? Unveiling the mystery behind Q1 growth

Kosovo's economy surpassed the rosiest expectations with a robust 5.6% yoy GDP growth in Q1 2024, exceeding even our optimistic forecast of 4.2%. This impressive performance marks a significant jump from the 4% growth witnessed in the previous quarter.

While all sectors contributed to the overall expansion, the growth rates of each sector were relatively modest. The largest increases were observed in Arts & Entertainment (2.7% yoy) and Financial Activities (2.2% yoy), but it's important to remember these sectors have a smaller base within GDP.

Meanwhile, larger sectors like Industry (1.8% yoy) and Trade (1.3% yoy) exhibited a marked slowdown compared to their stellar performance in the previous year (over 6% yoy each). Public administration, health, education recovered from negative growth in 2023, posting a moderate 0.9% yoy expansion.

Similarly, Agriculture grew by 1.3% yoy, but this represents a significant slowdown from last year's strong performance (3.7% yoy). Real estate, a major attraction for foreign investment (particularly from the diaspora), displayed the slowest growth (0.3% yoy).

The modest sectoral growth seems to contradict the impressive headline GDP figure. So where did the excellent economic growth come from? The apparent discrepancy can be explained by a significant 23.2% increase in net taxes within the GDP calculation. This suggests a substantial rise in government revenue collection compared to Q1 2023, where net taxes saw a mere 0.5% expansion.

Indeed, the tax performance of the first quarter of 2024 was impressive, with an increase of 17.4% yoy. This growth came from significant increases in both direct (7.6%) and indirect taxes (18.5%). Double-digit growth of VAT (11.8% yoy) and personal income tax (14.3% yoy) confirm the increased efforts to formalise the economy.

Kosovo's efforts to combat the informal economy and fiscal evasion appear to be bearing fruit. Additionally, the recent implementation of a new tax law in January might have streamlined collection processes and boosted efficiency. Furthermore, the IMF confirms that Kosovo surpassed its 2023 tax collection target by 1% of GDP compared to 2022.

While the strong Q1 performance is encouraging, it's crucial to monitor the sustainability of the current tax collection pace and its potential impact on the broader economy. A deeper analysis of sectoral performance and ongoing efforts to combat informality will be essential for a comprehensive understanding of Kosovo's economic trajectory.

Turning to the spending approach of GDP, the biggest contributor remains final consumption by households, with a remarkable annual growth of 4.9% in real terms, which reflects strong domestic demand within Kosovo.

Another key contributor is the export of goods and services, which increased by 9.9% in real terms. Within exports, exports of goods continue to contribute negatively as in 2023 due to the lower foreign demand for goods. However, the rate of decline has decreased to -1.9% YoY from -6.4% on average in 2023, potentially indicating a recovery in foreign demand or competitiveness. On the other hand, exports of services, driven by travel and IT sectors, surged by 14.0% yoy in Q1 2024, significantly boosting overall export growth. Nevertheless, due to a higher import growth rate (10.9% yoy), net exports continue to make a negative contribution to GDP. However, the drag on GDP has been substantially reduced from -6.7% in 2023 to a mere -0.7% in Q1 2024 in real terms. Addressing this trade deficit remains a key challenge for long-term economic growth and the competitiveness of Kosovo's economy.

Gross capital formation continued its moderate contribution with a 0.8% yoy increase, aided by higher government capital expenditures. Public consumption on the other hand saw a substantial rise of 8.9% yoy, suggesting increased wages and public sector investments in the economy.

Kosovo's impressive Q1 growth tops our initial forecast, but future downward revisions could occur as more data becomes available, similar to past trends. As with past revisions, future data releases by ASK could lead to adjustments in the final growth figure.

We will closely monitor developments in the coming months to determine if a forecast revision for 2024 is necessary. In the meantime, we aremaintaining our forecast of 3.9% growth for the whole of 2024, which is moderately higher than the3.3% recorded in2023.