Annual progress report 2015 albanian contribution – input I september 2014 – may 2015 table of contents

The construction sector accounts for the largest contribution in the expansion of the economy during 2014 Q4. Construction activity mainly benefited from public capital expenditures allocated to several public works. Trade and other community, social and personal service activities account for the highest contribution in the services value added growth, although their activity stood below the expansion in Q3. In addition, it appears that the negative impact from the shrinkage in air transport activity during 2013 Q4 was offset in 2014 Q4. Overall, transport contributed marginally, by 0.1 percentage points to growth. The growth in the in post and communication declined by 9.5% annually. The data also highlight some improvements in the manufacturing industry, mostly due to the recovery in the energy branch. Value added in agriculture and in the extraction industry registered an annual decline during Q4.

The economic sentiment indicator declined from 2014 Q4 to 2015 Q1, by 4.6 points. However, its level, around the long term average, remains consistent with moderate positive economic growth in Q1. It must be highlighted that the information obtained from surveys reflects a decline in economic sentiment for all the sectors in the economy. Higher capacity utilisation rates in construction and services sectors compared 2014Q1, point to positive developments in these sectors in 2015Q1. On the other hand, survey results signal a weakening of activity in industry and trade branches.
Table 1. Value added by economic activity.

Gross value added (in real terms)	2011	2012	2013	2014	2014				2014
					Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
	Contributions to year on year percentage changes (in p.p.)				Year on year percentage changes				Contributions to year on year percentage changes (in p.p.)
Total	3.2	1.0	1.5	1.9	1.6	-0.2	3.9	2.4	1.6	-0.2	3.9	2.4
Agriculture, hunting and forestry	1.0	1.1	0.1	0.4	3.6	3.7	2.0	-2.7	0.9	1.2	0.4	-0.7
Extracting industry	0.6	0.5	0.7	0.6	39.3	6.0	6.3	-0.5	2.1	0.4	0.4	0.0
Manufacturing (including energy)	-0.1	-0.4	0.5	-0.3	-9.1	-7.5	1.3	3.4	-0.9	-0.7	0.1	0.3
Construction	0.5	-2.1	0.1	-0.2	-4.5	-21.0	9.0	10.8	-0.5	-2.6	1.0	1.6
Trade, hotels and restaurants	0.1	0.6	0.1	0.8	1.3	4.9	10.1	3.3	0.2	0.6	1.7	0.5
Transport	0.7	-0.3	-0.3	-0.6	-22.4	-20.5	-24.0	3.0	-0.7	-0.7	-1.0	0.1
Post and communication	-0.2	0.1	-0.2	-0.1	0.1	-3.1	5.4	-9.5	0.0	-0.1	0.1	-0.3
Other services	0.6	1.4	0.5	1.1	2.2	5.9	4.2	3.2	0.6	1.6	1.2	0.9

Source: INSTAT and Bank of Albania.
GDP in current and constant prices, aggregate as well as breakdown by expenditure

After the contraction of Q2, theaggregatedemand picked up in the second half of 2014. This growth was led by domestic demand, while net exports contribution was negative. A number of factors supported the recovery of domestic demand; improvingconfidence in the economy, lower interest rates, increased employment,stimulating monetaryconditions and higher public investments. Foreign demand was weak and export growth remained subdued. Higher imports drove the negative contribution of net exports.

The two components of private domestic demand, consumption and investment, gave a positive contribution to growth. Private consumption growthbenefited from improved confidence, rising remittances, increased consumer credit and low inflation rate. However in Q4, private consumption slowed down due to a fall in confidence and a budget constraint induced by the need to pay electricity bill arrears.

Private investmenthas shown a gradual recoveryduring the year. The latter was a result ofimprovedbusinessconfidence, increased consumerdemand and betterliquidityin the private sector due to clearance ofgovernmentarrears. The growth during the second half of the year reflected mainly the higher construction activity, linked to the utilization of the government funds for infrastructure work. Recovery of demandforfinal productshas improvedthe overall financialsituation of businesses andhas aidedcapacity utilizationin the last quarter.

External demand was sluggish. Net exports contributed negatively to economic growth in second half of the year. Real net exports deficit expanded by 18.6% and 4.8% in Q3 and Q4. This performance reflects the sluggish performance of Albanian exports and a faster increase of imports. Export dynamics reflect lower demand by our trading partners, supply-side shocks in some sectors of production and the drop in oil prices. On the other hand, the increase in imports mostly reflects the improvements in domestic consumption and investments. For Q1 2015, trade data indicate a continued negative contribution of net exports to aggregate demand.
Estimated impacted of the economic crisis and outlook for the year forward

The economic crisis has impacted the Albanian economy through various channels. Foreign financing conditions for the Albanian economy have worsened. Firstly, the overall increased risk aversion has diminished the interest of foreign investors in developing economies. Secondly, remittances, which remain an important source of finance for consumption, fell sharply with the deepening of the crisis in Greece and Italy. Thirdly, in the last two years, the European banks have followed a stricter strategy with respect to their exposure into the SEE countries. This process has been exacerbated by the need to comply with the new regulatory framework of the European Banking Authority. This has contributed to a large extent to the tightening of the credit conditions in the domestic market and to the cautious approach in financing the economy. On the trade side, the impact of the crisis has been felt in the exporting sectors of the economy, mainly in the form of increased market uncertainties. However, Albanian exporters have managed to increase exports during these years. On the positive side, the IMF arrangement and the more recent approval of the candidate status for Albania are expected to act as signalling mechanisms for the stability and potential of the economy and help ease further the external pressures on the domestic economy.

In the past year, Albanian economic activity recovered while inflation remained low. The BoA expects the moderate upswing of 2014 to strengthen and to gradually become more self-sustained in the coming years. Despite the recent floods in the country and the slowdown in oil exports, real GDP growth for 2015 will be higher than in 2014. However, the economy is expected to continue operating below its potential growth and inflation will remain below the BoA target in 2015. Domestic demand is expected to be main driving force behind economic growth. The former is expected to benefit from low prices and low interest rates, improved confidence, and a gradual pick up in the lending activity. The household disposable income is expected to increase on the back of improved labor market and low overall inflation. On the other hand, precautionary behavior will still have some drag on consumption growth. The easing of private sector liquidity constraints through continued arrears clearance, the moderation of bank risk aversion and the continuation of the monetary policy stimulus should support private investment demand. As household and business improve their financial position, the lending activity is expected to gradually recover. Public sector demand is expected to grow minimally in 2015; with fiscal stimulus unevenly distributed throughout the year. Public investments are expected to pick up prior to the local elections in June and slow down afterwards in line with the consolidating path of the fiscal policy. On the other hand, weak developments abroad are expected to slow down growth especially in the first half of the year, but will be counteracted somewhat by the fall in the oil prices and a weaker Lek exchange rate. For the second half of 2015, foreign demand is forecasted to pick up and aid export growth in the country.

In line with the expected recovery of the domestic demand, we forecast the core inflation to rise gradually. However, the rise of core inflation may be tempered by the second-round effects of subdued inflation expectations and wage developments. Also, low commodity prices and consumer prices in international markets and the reluctance of businesses to pass through higher costs and restore profit margins will lead to a likely undershooting of the BoA inflation target in 2015. As aggregate demand converges to its steady state and the monetary stimulus is fully transmitted into the real economy, inflation will reach the BoA target in the medium term.

The overall balance of payments in 2014 resulted in an increase in foreign reserve assets by EUR 97.2 million (ALL 13599.7 million)²⁵. The current account balance recorded a deficit of about EUR 1303.3 million (ALL 182426.8 million), up by 25.7% y-o-y. The current account deficit (excluding official transfers) is estimated at 13% of nominal GDP or about 2.2 percentage points higher compared to the previous year. Financial flows in the capital and financial account have increased by about 35% annually and have financed 76.1% of the current account deficit registered in the same period.

At the end of 2014, the gross external debt stock of Albania was valued at a total of EUR 6665.2 million (ALL 934063 million). It increased by EUR 487.9 million (ALL 68367.7 million) compared with the end of Q4 2013 and by approximately EUR 42.2 million (ALL 5907.5 million) compared with the level at the end of Q3 2014. In annual terms, the gross external debt increased by 7.9%. The majority of the increase is attributed to a pick-up in external borrowing by the public sector, specifically by the general government. The data for the end of 2014 showed that the general government sector represented 39.7% of the total external debt. The rest is distributed among other sectors 17.3%; depositing corporations 18.3%; foreign direct investment and intercompany loans 23.5% and monetary authority 1.2%

Developments in the labour market in 2014 Q4 show mixed dynamics. According to the Quarterly Labour Force Survey (LFS), the unemployment rate was 18.0%. During the year, the unemployment rate fluctuated around 17.9%, a higher rate compared to the estimated 16.4% for the previous year. On the other hand, LFS results show that employment continued to grow by about 8.6% year on year in Q4. As a result, the employment rate fluctuated around 52.1%, remaining above the 48.2% estimated for 2014Q4. In addition, the data show that the working age participation rate has increased. This was reflected in the rise of labour force participation rate to 63.6% in Q4 from 58.1% in 2013 Q4.

Administrative data also indicate a 4.1% growth in the number of employees in the private non-agricultural sector. The number of public sector employees declined by 0.1% annually in Q4. The positive employment trend was broadly based across branches. Particularly, in Q4 employment grew at a higher rate in construction and energy activities.

The average wage index^[1] in the economy suggests an annual decline by 4.6% in nominal terms and by 5.8% in real terms in 2014 Q4. It has to be noted that since 2014 Q1, INSTAT has changed the methodology^[2] of short term business statistics. This change has affected to a certain degree the trajectory of the average wage index. As a consequence of the application of the new methodology, the average wage dynamics along 2014 in the economy reflect also base effects. According to the new data, average wage in the economy declined in 2014, on average by 3.4% year on year, compared to the high average positive annual growth rate recorded during 2013, by 11.7%. In the public sector, the monthly average wage registered an increase of 2.3% and 1.0% year on year in nominal and in real terms, during 2014 Q4. In 2015 Q1, business survey results point to a positive employment situation and increased wages.