Kosovo Watch: First signs of the economy slowing down
In Q1 2022 the annual growth of GDP was at 4.9%, below our forecast of 5.4%, negatively impacted by increased inflationary pressures and heightened uncertainty. The latest government interventions to help households keep the spending power, the increase in the minimum wage and unrelenting price pressures deriving from the dire international situation will keep inflation at double-digit levels in 2022, with our forecast at 10.4% on average, versus the initial estimate of 8%.
Deceleration of growth in Q1 2022 vs Q4 2021
After a strong recovery in 2021, with GDP jumping by 10.5% yoy, (6.4% in Q4 2021), Kosovo's economy grew at a relatively moderate rate in the first quarter of 2022. In Q1 2022 the annual growth of GDP was 4.9%, below our forecast of 5.4%, negatively impacted by increased inflationary pressures and heightened uncertainty.
| International upheaval to be felt more strongly in the Q2 & Q3 2022 |
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| ASK, RBI/Raiffeisen Research |
Private consumption continues to be the main driver of the economy
Like in 2021, private consumption, the largest component of the economy, continued to be in the driver seat, expanding by 11.6% yoy in Q1 2022. This double-digit expansion of household consumption could be partly explained by panic buying in the aftermath of the war in Ukraine. Thus, it is not expected to spread into the rest of the year.
Moreover, exports posted a noteworthy increase of 22.6% yoy, but with imports also increasing by 20.0% yoy the net foreign trade contribution to GDP was still negative. On the other hand, private investments contributed positively to the economy, with the gross capital formation up by 4.4%. The component acting as a drag on the overall economic growth was government expenditures which declined circa 2.5% yoy, mostly due anti-Covid supportive measures fading away in 2022, in reflection of the improved public health situation.
| Public consumption holding back growth in Q1 after reducing pandemic costs |
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| ASK, RBI/Raiffeisen Research |
Trade with the highest growth, public administration the only drag on the growth
In first quarter of 2022, all sectors of the economy, besides public administration (health, education, social insurance, and social activities) contributed positively to the growth. Trade (tourism, transport included) - one of the largest sectors of the economy - marked the highest growth, jumping by 8.6% yoy and providing the main positive contribution to the real GDP. Furthermore, industry growing by 4.1% yoy and construction by 3.8% yoy were also net contributors to the economic expansion. Other sectors had a lower impact, while public administration decreased by 0.3%, mostly due to the fact that last year the government was more active in supporting the health sector to face the pandemic consequences.
| Strong increase for trade & financial activities in Q1 2022 |
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| ASK, RBI/Raiffeisen Research |
High inflation to limit consumer spending for the rest of the year
The inflation rate has been rising gradually since the second half of last year. However, amid war in the first months of 2022, it grew remarkably higher in May 2022 — at 12.5% — moving past our inflation forecast in the first half of 2022.
The latest government interventions to help households keep the spending power, the increase in the minimum wage and unrelenting price pressures deriving from the dire international situation will keep inflation at double-digit levels in 2022, with our current forecast at 10.4% on average, versus initial expectation of 8%.
| Demand driven inflation pressures will be adding to high import prices |
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| ASK, RBI/Raiffeisen Research |
Our forecast for the real GDP growth in the second quarter is limited to around 2.2% yoy undermined by the high prices which will be reflected also in the Diaspora inflows due to high inflation levels in Eurozone.
The high CPI will dent in our view the private consumption, and it will impact more the vulnerable households as the food category is the largest component in the consumer basket. However, there are also some upward risks to the overall impact as some help is being provided by the government to the population. Therefore, the GDP growth in the second part of the year is forecasted higher at 2.8% in 3Q and 4.7% in Q4 2022, unchanged from our previous call.
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Fjorent RRUSHI
Albania Fjorent is the head of ALM & Research for Raiffeisen Bank Albania. After a MSc in International Business from the University of Trieste and an MBA from MIB School of Management in Italy he started as an Investor Relations financial analyst at the aerospace & defense company Leonardo in Rome. After that he moved to the Italian Stock Exchange in Milan promoting blue chip companies through roadshows with institutional investors and after the merger with London Stock Exchange was in charge of primary markets of potential to be listed companies in Eastern Europe. In 2011 moved back to his native country to join Raiffeisen Bank in ALM & Research team in charge of fund transfer pricing, liquidity management and IRRBB. After a period at Intesa Sanpaolo Bank Albania as Head of pricing starting from 2021 he is heading the ALM & Research of Raiffeisen Bank Albania. Apart from macroeconomic analysis of particular interest for him is the disruptive technological transformation impacting the banking system. Fjorent’s hobby is football and he enjoys theatre and has been an amateur player as a teenager.
Valbona GJEKA
Albania Valbona is a financial analyst in Raiffeisen Bank Albania and looks back on more than 15 years of analytical experience in the bank. As now, she is the responsible for macroeconomic research for Albania and Kosovo market and covers developments of the foreign currency in the local market. Prior to that, she worked in National Institute of Statistics as methodology specialist. She holds a diploma in Mathematics and a master’s degree in Marketing from Tirana University. She enjoys traveling, artistic activities and volunteering.
Recent days have been full of hawkish central bank surprises. With inflation climbing higher also among advanced economies, central banks are eager not to fall behind the curve. The SNB surprised with a 50bps hike, the FED even hiked by 75bps and the ECB held an ad hoc meeting to bring down peripheral spreads. On FX markets the Swiss franc appreciated strongly on the news, while EUR/USD was more undecided between an aggressive FED and declining EUR risk premia. That central banks cannot always do the trick was visible in Hungary, where the HUF strengthened only mildly on an extra 50bps hike by the MNB. Next week it's the CNB's turn, which intervened quite regularly on the FX market in recent weeks. In SEE the currencies of the region have benefited lately and that's with the summer having only just started. |
This week the ECB delivered on the eagerly awaited roadmap for monetary policy normalisation. Next week it's the Fed's turn to take another step towards a neutral stance with 50bp being widely expected. Meanwhile we are nearing the end of the hiking cycle in Central Europe.