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Analizë: GDP Growth Patterns: Construction Sector Shows Recover

Kosovo’s economy took an unexpected twist in Q2 2023, with GDP growth falling short at 2.0% yoy. Inflation saw a rollercoaster ride, from decline to new pressures. Political instability and Serbia relations add to the complexity. Our 2023 GDP forecast is under review. Stay tuned as we delve deeper into these unfolding economic tales, dissecting the challenges and prospects that define Kosovo’s economic journey in 2023.

Sluggish growth amidst troubling signs

Based on the latest data, Kosovo’s economy saw limited expansion in the second quarter of 2023. During Q2 2023, the local economy grew by a mere 2.0%, significantly lower than both our anticipated growth rate and the projections of other local entities.

This decrease in the growth rate was substantiated by concerning short-term service statistics for June, released two days prior to the quarterly GDP growth report. These statistics revealed that the turnover index for services had shifted into negative territory in June, following a substantial 39% year-on-year growth observed in April.

Sectoral performance: Challenges and glimmers of recovery in Q2 2023

Regarding specific sectors, “Trade, transport and accommodation” which carries the most significant weight in the GDP structure, exhibited a growth rate of only 2.4% year-on[1]year, in stark contrast to the 12.6% year-on[1]year growth recorded in the same quarter of the previous year. Additionally, other service sectors such as IT, real estate, and financial services also saw
subdued growth rates of 2.0%, 2.2% and 3.6% year-on-year, respectively. On the other hand, sectors like professional activities as well as leisure activities, posted slightly higher growth rates of 5.1% and 5.8%, respectively. However, their contribution to the overall growth remained relatively limited due to their smaller base. Notably, the public administration sector, which ranks as
the second-largest among the services, contracted by 0.8% year-on-year.

The production sector encountered its share of difficulties, notably as the overall industry saw a decline of 2.0% year-on-year growth in Q2 2023. Although manufacturing managed to expand, it did so at a reduced pace, registering a year-on-year growth of 3.4%, a slowdown from the 7.8% growth observed a year prior. In contrast, the extractive industry remained in a state
of contraction due to low mineral prices and sluggish demand. Conversely, the construction sector showed signs of improvement with a growth rate of only 2.7%, which can be viewed as a noteworthy recovery when considering the sector’s sharp 10.7% year-on-year decline in Q2 2022. This positive shift is further highlighted by the construction cost index, which indicates a significantly lighter cost burden for the sector, with only a 1% year-on-year increase compared to the substantial 19.8% rise seen in Q2 2022. Meanwhile, agriculture continued to grow, albeit at a modest rate of 2.8%, remaining below its full potential.

Net exports drag, consumption resilience and investment reboun

When examining GDP components using the expenditure approach, noteworthy developments emerged. Exports of services surged by 13.6% year-on-year, showcasing robust growth. However, the export of goods had the opposite effect, declining by 10.7% year[1]on-year. Consequently, the overall expansion of both goods and services exports stood at a mere 5.9% year-on-year, a significant drop from the remarkable 36.0% year-on-year growth witnessed a year earlier when export prices soared.

On the flip side, imports of goods and services continued their upward trajectory, increasing by 6.3% year-on-year. This led to a
substantial trade deficit, contributing negatively to economic growth through net exports. Household consumption played a pivotal role in propelling growth, surging by 3.7% year-on-year, surpassing the previous year’s growth rate of 2.0% year-on-year. The boost in household consumption was primarily fueled by a 14% year-on-year increase in diaspora remittances during Q2 2023, alongside a 16.8% year-on-year rise in household loans during the same period.

Government consumption also grew by 4.0% year-on-year, while gross capital formation increased by 2.0% year-on-year. The latter rebounded significantly from the 12.4% contraction observed in the preceding year, as both the private and public sectors displayed a greater willingness to invest in a more stable environment characterized by declining inflation rates.

Inflation dynamics: A rollercoaster ride with emerging pressures

Inflation rates underwent a significant reduction, dropping from an average of 9.9% yoy in Q1 2023 to an average of 4.2% yoy in Q2 2023. This decline was particularly evident in specific sectors, notably in food and transportation prices, which correlated with the downward trend in international markets.

Nevertheless, there was a slight uptick in inflation in August, registering a 3.2% annual rate and a 1.0% monthly increase, signalling the emergence of new inflationary pressures. Both core inflation and headline inflation experienced a surge, reaching 4.0% in August from 3.2% in July 2023, indicating that broad-based inflation is likely to persist for an extended period.

Factors such as fluctuations in energy prices on the global market, the implementation of the new law governing public wages, and the tight labour market conditions could introduce additional inflationary pressures in the months ahead.

Downside risks for GDP growth in 2023

In conclusion, the underwhelming economic performance in Q2 2023 has prompted us to contemplate a revision of our GDP growth projections for the entire year. The presence of political instability in Northern Kosovo, coupled with the absence of a definitive resolution with Serbia, poses significant obstacles to Kosovo’s economic prospects. In order to foster long-term economic improvement, it is imperative to prioritize efforts toward normalizing relations with Serbia, implementing essential structural reforms, and establishing sustainability measures within the energy sector. Consequently, we are currently reviewing our GDP forecast for 2023, with a potential downward adjustment in mind.

  • By Fjorent Rrushi, Kryesues i ALM & Research, Banka Raiffeisen në Shqipëri; Valbona Gjeka, Zyrtare e Lartë për Hulumtim, Banka Raiffeisen në Shqipër