Albania Watch: Tourists and trowels, GDP +4.1% despite industrial nosedive

Albania's economy showcased strength again, with a 4.1% year-on-year growth in the third quarter. This follows two quarters of steady 4.0% expansion, as confirmed by revised figures. The first quarter's growth was adjusted upward from 3.8% to 4.0%, while the second quarter saw a slight downgrade from 4.1% to 4.0%. Our nowcast, which accurately predicted the third-quarter growth of 4.1%, was based on economic sentiment, public sector data, and other high-frequency indicators.

Trade, Transport, Accommodation, and Food Service sector, deeply linked with the tourism industry, led economic growth, contributing a significant 1.3 percentage points (pp) to GDP. This surge reflects a booming tourism season, with Albania welcoming an impressive 10.4 million foreign tourists in the first 10 months of 2024—a remarkable 16.1% increase from the previous year. The tourism boom not only brought in more visitors but also drove spending sky-high, with third-quarter tourism receipts soaring by 14.8% year-over-year, according to balance of payments data. These figures highlight the powerhouse role of tourism in driving Albania's economic engine.

Public Administration, Education, and Health contributed about 0.9pp to GDP, reflecting increased spending in these sectors of the economy.

Professional, scientific, and technical activities, which have experienced double-digit growth for five consecutive quarters, contributed 0.8pp to GDP. This growth is particularly welcome as it indicates Albania is moving towards a more value-added economy, focusing on high-skilled services and innovation.

Construction, powered by substantial investments in infrastructure, residential, and commercial properties—particularly in tourist hotspots—continued its upward trajectory, albeit at a slower pace. In Q3 2024, the sector grew by 5.3% year-on-year, a significant drop from the 10.5% growth seen in the previous quarter. This sector contributed 0.6pp to GDP, down from over 1.0pp in the prior two quarters.

Other service sectors, including financial activities, real estate, and entertainment, experienced moderate growth rates of 6.3%, 4.3%, and 3.9% respectively, contributing less to GDP.

In contrast, the production sectors of agriculture and industry made negative contributions. Agriculture, which comprises about 18% of GDP, has struggled, remaining in negative territory for eight consecutive quarters. In the third quarter, agriculture decreased by 2.5%, compared to a 1.2% decline in the same period a year earlier, resulting in a negative contribution of 0.4pp to GDP.

Similarly, the industry sector also detracted from GDP, with a 4.0% yoy decline, contributing negatively by 0.4pp. Manufacturing, in particular, fell by 6.5% yoy. Both agriculture and manufacturing have been adversely impacted by a decline in exports, largely due to the appreciation of the local currency, which strengthened for the third consecutive year.

Q3 2024 real GDP saw significant shifts in the contributions from various sectors. Notably, private consumption, which had been a strong growth driver, slowed considerably, contributing only 0.6pp to GDP growth—a sharp decline from the 3.9pp contribution in the second quarter.

Public consumption contribution remained stable, contributing 0.8pp to GDP growth, consistent with its performance in the second quarter.

Gross Fixed Capital Formation (GFCF) showed a slight decline, contributing 1.0pp compared to 1.1pp in the previous quarter. Despite these minor reductions, both public consumption and GFCF continued to provide steady support to overall growth.

Net exports continued to negatively impact GDP growth, with a contribution of -2.0pp, worsening from -0.7pp in the second quarter. This increased drag was offset by a strong rebound in inventories and statistical discrepancies, which added 3.7pp to GDP growth. This positive contribution marked a significant recovery from the -1.1pp in the second quarter, playing a crucial role in achieving the overall growth rate of 4.1pp despite the slowdown in private consumption and the heightened negative impact from net exports.

In the third quarter of 2024, the contribution from inventories and statistical discrepancies rebounded strongly, adding 3.7 percentage points to GDP growth, out of the total 4.1%. This significant rebound suggests that businesses may have restocked inventories after reductions in the second quarter, possibly due to increased demand or preparation for seasonal sales. It might also reflect corrections or adjustments in statistical measurements in the future, to better align with actual economic activities. Initial GDP estimates often rely on incomplete data and forecasts, leading to revisions as more comprehensive information becomes available. High-frequency indicators like retail sales may indicate stronger private consumption, but these are not always fully captured in preliminary GDP estimates.

The Q3 GDP accounts were notably influenced by this increase in inventories and statistical discrepancies, partly explained by strong demand prospects and the growing role of inventory-intensive sectors, such as retail trade, in Gross Value Added (GVA) growth. Additionally, some large non-residential construction projects and public works are typically classified as inventories during their construction phase and later reclassified as Gross Fixed Capital Formation (GFCF) upon completion. This practice can temporarily inflate the inventory component, only for it to be adjusted in future revisions.

Given the size of the inventory buildup in Q3 and the historical pattern of reclassifying such buildups into other GDP components, especially GFCF, we anticipate that future revisions will likely reveal stronger contributions from investment, private consumption, and possibly tourism as growth drivers. The apparent low contribution of private consumption in Q3, compared to high-frequency indicators like retail sales, suggests that some of the current statistical discrepancies might be reallocated to private consumption and GFCF in subsequent revisions. This would more accurately reflect higher consumer spending and investment growth, highlighting the dynamic nature of economic measurement and the importance of ongoing data collection and analysis for precise GDP estimation.

In conclusion, Albania’s economy demonstrated robust performance in the first nine months of 2024, expanding by 4% year-over-year, driven by the construction and tourism-related sectors. However, the industrial sector remained in negative territory, hindered by export challenges partly due to the local currency’s appreciation. Domestic demand fueled economic growth, with significant expansions in private and public consumption, alongside moderate gross capital formation and imports supporting demand for foreign products.

With an officially confirmed GDP growth of 4.1% in Q3 2024, a revised growth rate of 4.0% for the first half of 2024, and an anticipated economic growth of approximately 4% in Q4 — based on our nowcast forecast using current data — we project that the overall GDP growth for the entire year of 2024 will likely align well with our forecast of 4.0%.

Expectations for Q4 remain strong, fueled by continued success in tourism and higher public investments anticipated in the pre-election period, further boosting economic activity. Wage growth expectations will also support household consumption. These factors collectively suggest a solid annual growth trajectory, reflecting both current economic strengths and future potential.