Kosovo Watch: Growth slows amid ongoing geopolitical turmoil
All in all, low economic growth in Q2 2022 is another confirmation of the impact that the war in Ukraine, through elevated inflation and ongoing energy crisis, will have on the economy not only in the second part of the year but also in 2023. Therefore, due to the worsening market conditions and increased geopolitical risks in Eastern Europe we have put under revision Kosovo's GDP growth of 2022 with a possible downgrade compared to our actual forecast of 3.7% yoy.
Q2 2022 growth pace halved compared to Q1 with war taking a toll
After a significant rebound of the economy by 10.7% yoy (upgraded from 10.4% previously) in 2021 and a moderate expansion of 4.5% yoy in Q1 2022 (slightly lower from the 4.9% preliminary figure), the economy of Kosovo lost further pace to just 2.1% yoy growth in Q2 2022, but in line with our forecast of 2.2%.
Economic growth facing the headwinds of international upheaval
The breakdown of GDP components, points to decelerating household consumption at a significantly lower pace of 3.2% compared to 10.4% increase of the previous quarter. Private consumption has been one of the pillars of economic growth and is hugely impacted by inflows of Kosovars working abroad.
One of the brightest points were exports of goods and services which jumped by 36.0% yoy thanks to travel services that moved up by 55.3% yoy. Gross capital formation declined substantially by 16.8% yoy pointing to soured mood of private companies, especially in the construction sector. Fiscal impulse was also absent with government consumption decreasing by 2.8% compared to previous year.
Exports powering ahead, but from a low base
Private consumption to suffer from high inflation
New price developments in the global markets reflecting the worsening armed conflict in Ukraine and high uncertainties linked to it, have adversely affected the small economy of Kosovo. The inflation rate has been gradually on the rise, peaking at 14.2% in July 2022, but posted a deceleration in August for the first time in eight months. Still, it remains high at 13.0%, with food prices increasing by 19.3% yoy, denting the purchasing power of households in the quarters to come.
However, the latest government decision to support the economy with other Eur 150 mn to help the most vulnerable to tackle inflation could somehow mitigate the impact on private consumption.
Construction acts as a drag on the economy
In Q2 2022, Construction, and Public administration (health, education, social insurance, and social activities) contributed negatively to growth, declining respectively by 18.0% yoy and 0.6% yoy. However, Construction's significant decline is due to higher prices reflected in the elevated construction costs. Furthermore, public investments in infrastructure, another important part of construction industry, were about 35% lower than in the first half of the previous year. On the positive side, Trade (tourism, transport included) — one of the largest sectors of the economy — marked the highest growth, jumping by 12.6% yoy, providing the main positive contribution to real GDP. The other sectors had a net positive contribution in real GDP, but with a lower impact.
Downside risks for GDP growth in H2 2022
All in all, low economic growth in Q2 2022 is another confirmation of the impact that the war in Ukraine, through elevated inflation and ongoing energy crisis, will have on the economy not only in the second part of the year but also in 2023. Therefore, due to the worsening market conditions and increased geopolitical risks in Eastern Europe we have put under revision Kosovo's GDP growth of 2022 with a possible downgrade compared to our actual forecast of 3.7% yoy.
Tweet 
Post 
Email
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.
The fear of Kosovar leadership is that giving North Kosovo full autonomy could be possibly associated with the emergence of another “Republika Srpska” or even a new “Donbas” in Kosovo. In other words, Kosovar Albanians perceive it as a potential Trojan horse, mindful of the case of “Republika Srpska” in Bosnia. This would make the state functioning of the youngest country in Europe very difficult as a history of events and frictions in Bosnia indicate. |
Q2 GDP results surprised mostly to the upside in Europe. However, this should not distract from the poor outlook signaled by sentiment surveys for the rest of the year. Inflationary pressure remains high and the question is where is the peak in inflation and key interest rates.