Albania Watch: Bricks and beaches - booming sectors lift Q1 2024 GDP to 3.6%

In the first quarter of 2024, Albania's Gross Domestic Product (GDP) saw a notable increase of 3.6% in volume terms compared to the same period in 2023, according to the Institute of Statistics. While this figure falls slightly short of the robust 3.8% growth recorded in the last quarter of 2023, it aligns closely with our forecast of 3.7% for the entire year. A combination of positive factors drives this stability.

The construction industry was a major contributor, adding 1.2 percentage points to growth. This was due to factors like increased government spending on infrastructure, a booming housing market, and new investments in the accommodation sector. Public administration, education, and health services also played a significant role, adding 0.9 percentage points. This suggests growth in government spending after the first wave of salary increases. The trade, transportation, accommodation, and food service sectors collectively contributed 0.8 percentage points, indicating continued consumer spending and a potentially strong tourism industry.

Other positive contributors to GDP growth included real estate activity (0.4 percentage points), professional and administrative services (0.3 percentage points), and information and communication (0.06 percentage points). These sectors point to a growing professional services class and an expanding digital economy. While their individual contributions were smaller, they collectively signal a shift towards a more service-based economy in Albania.

However, not all sectors contributed positively. Agriculture subtracted 0.3 percentage points from GDP growth, which could be due to a structural shift in the economy and a decline in the working force in this sector. The industry also had a negative contribution (-0.15 percentage points), though to a lesser extent due to a slowdown in manufacturing suffering from the sharp appreciation of lek in the last few years.

Quarterly adjustments provide additional insights into the economic dynamics. Compared to the previous quarter, the seasonally adjusted GDP increased by 1%. The construction sector experienced a quarterly growth of 3.3%, and the trade, transport, accommodation, and food services sectors grew by 3.6%. Professional services and administrative services increased by 2.2%, and the arts, entertainment, and recreation services saw a significant rise of 5.2%. On the downside, agriculture decreased slightly by 0.3%, public administration, education, and health by 0.2%, industry by 0.3%, and financial and insurance services by 2.5%. The information and communication sector experienced the largest quarterly decline of 4.7%, while real estate activities saw a minor decrease of 0.05%.

Looking beyond the sectoral breakdown, Albania's GDP growth can also be analyzed through the lens of expenditure. Here, household spending played a major role. Household final consumption expenditure rose by 3.7% year-over-year in Q1 2024, demonstrating that Albanian households continue to spend on goods and services, supported by increased employment and real salary growth. Notably, Albanian households have weathered the inflation wave well, with real salaries increasing each quarter since 2022. Additionally, access to credit saw a significant boost in Q1 2024, aided by lower interest rates, further stimulating household spending.

Government spending also contributed positively to GDP growth, with general government consumption expenditure increasing by 3.5%. Despite higher investments in public services, the government maintained a surplus in Q1 2024 and plans to further increase investments in the latter half of the year.

Gross Fixed Capital Formation (GFCF) increased significantly by 7.7%, indicating a rise in business investment in machinery, equipment, and buildings, as evidenced by higher imports of machinery.

However, Albania's trade performance in Q1 2024 was mixed. Exports of goods and services fell by 9.9% compared to the same quarter in 2023. This decrease in exports could be due to a number of factors, such as a slowdown in Eurozone demand, a sharp appreciation of lek which resulted in a dramatic decline in exports of goods (-30.8%). On the other hand, imports of goods and services rose by 7.6% in real terms, with a more balanced increase in imports of goods and services.

It is worth noting that after a significant drag of 6 percentage points on real GDP in Q4 2023, inventories and statistical discrepancies had the opposite effect in Q1 2024. A scheduled revision of GDP in September is expected to provide further clarity, as quarterly data is particularly susceptible to statistical errors due to the highly volatile administrative data feeding into these calculations.

In conclusion, the robust economic growth in Q1 2024 bodes well for the remainder of the year. While growth slowed slightly compared to the previous quarter, the detailed sectoral and expenditure breakdown reveals several positive underlying trends. These trends support our forecast of continued economic expansion in Albania throughout 2024. High-frequency data and sentiment indicators suggest stronger growth activity in Q2 2024, which we estimate at 3.9%. Therefore, we maintain our overall GDP growth forecast of 3.7% for 2024, primarily driven by the construction and services sectors, particularly tourism. The wage increases implemented in July for a significant portion of the public administration are expected to contribute to this growth, along with an anticipated rise in public investments in the latter half of the year ahead of the parliamentary elections in H1 2025. Private consumption is projected to be a key driver of economic growth, and a recovery in net exports should further enhance real activity.