Kosovo Watch: Q4 2020 GDP up thanks to private sector resilience

Notwithstanding partial lockdowns the release of Kosovo’s GDP showed the economy expanded by 0.7% on a yearly basis in Q4 2020. Restrictions due to the pandemic continued to be in place in that period, even though not as stringent when compared to other countries, therefore the increase versus Q4 2019 came as a surprise. We had projected GDP dynamics to remain in the negative territory in Q4 2020 (-2.1% in terms of our quarterly forecast and -5.1% in our annual figure forecast). Even though we were in the optimistic range of the forecast compared to -6% of IMF and -8.8% of the World Bank, the economy picked-up earlier even compared to our projection.

Q4 2020 displayed quite an improvement compared to the third quarter's downturn of approximately -7.3%. Together with the Q1 and Q2 figures, denoting +1.3% and -9.3% respectively, the whole economy suffered a full year slump of -4.1% in annual terms, a milder outcome compared to our projection. Primary contributors to the positive GDP figure were: “Industry”, with a yearly increase of 8.4%, “IT” with a 9% jump & “Financial Services” which increased by 25.3%.

On the expenditure side, the main positive contribution came from the increase of private consumption, which posted a growth of 3.8%, whereas Gross Fixed Capital Formation component decreased by 10.9%. An improvement in the structure of net exports was observed, especially compared to the previous quarter (exports increased by 11.2% while imports of goods and services by only 3.7%).

GDP figures are prone to significant revisions by Kosovo Institute of Statistics, and we are taking these preliminary figures with a pinch of salt. The third quarter 2020 increase of private consumption of 16.9% especially, in the middle of the pandemic, warrants some caution. The estimates of 2020 quarters are provisional and will be revised based on annual GDP to be published in September 2021.

Vaccination of the population has initiated, but at a lower pace compared to neighboring countries and might result in a gradual easing of restrictions, allowing GDP to pick up and follow an upward trend in the following quarters. Despite all the uncertainty that exists regarding the evolution of the pandemic and the developments related to the SARS-Cov-2 vaccine, we expect the recovery to start in 2021. GDP will increase by 4.5% this year.

After many years of political instability, the newly established government has a commanding majority. The election of Vjosa Osmani as the new president on 4 April removed the final roadblock to the smooth functioning of the institutions and eliminated the threat of early elections. Therefore, the economic recovery should be the focus of the new government and the much-needed structural reforms could finally be adopted.

Low labour participation, high unemployment rates and immigration, reflect both insufficient economic dynamism and the large informal sector. These structural constraints have so far prevented faster per-capita income convergence with EU standards. If these reforms are enacted, the potential GDP growth would be enhanced compared to the currently estimated 4.0%, closing the gap with neighbouring countries.