The economy in 2023 looks weird enough

Last year, the biggest blows to the Albanian economy, as well as to the economies of the neighboring countries, came from a series of geopolitical risks, where beyond the current political situation in the Balkans, between Kosovo and Serbia [1], the Russian invasion of Ukraine was the most influential in the chain of trade relations of import and export.

The impact of the war on the Albanian economy through the application of sanctions in line with the EU’s foreign policy, however, brought an insensible effect on the Albanian economy.

The greatest impact was brought by the uncertain political situation on the economies of the EU member countries, which had a diversion of energy and food supply sources, lost labor force and human capital, and this had consequences that are felt even this beginning year as quite strong in the labor market.

In these circumstances, in addition to the legacy from previous years, Albania’s economic growth in 2023 will be worsened/ improved by the progress and influence of some important indicators that represent the economic and political progress.

In 2023, inflation, rising interest rates, low growth rates, unsystematic supply chain issues will be prominent as they were in 2022, especially during the first two quarters of the year. However, based on the surprises reserved by tourism, energy, as well as if the reform policies are more proactive and the strengthening of the regulatory framework with an impact on the huge corruption, we will notice a gradual improvement in most of the main economic indicators until the end of the year.

What is expected to influence the most to be considered by each actor (institution, business, organization or individual) in the Albanian society during the year 2023?

First, there is the continuation of the impact of COVID-19, which, together with the current impact, should not have surprises with material implications for the economy.

Residual effects of the COVID-19 pandemic include episodic shortages that have complicated business planning and coordination and kept prices higher than they would have been under pre-pandemic conditions. Meanwhile, the health situation moves to an endemic approach in 2023[2], where shortages related to COVID-19 should become rarer, helping prices in goods and services affected by the effects of the pandemic to ease further during the year.

Uncertainty about the course of the conflict in Ukraine remains predicted according to the analysis of international organizations without major escalation at least until the beginning of summer.

In general, a similar increase in commodity prices is not expected for Albania as in 2022.

Looking ahead, the softening of demand will dampen inflation. While crude oil prices should ease by 2023, high energy costs will set a floor that will be the new status quo, and this will limit the fall in inflation.

The second is inflation, which will slow down significantly in 2023, but reaching the central bank’s targets will be a multi-year process.

After reaching the highest levels in 2022 compared to recent decades, inflation will moderate in response to tightening financial conditions, but also softening demand and easing supply chain conditions.

Downward price pressures are already present in the market.

The monthly change of the consumer price index in December 2022, compared to November 2022, is 0.4%. This comprehensive indicator of commodity prices is flat in December 2022 from its record high in June 2022. Agricultural commodity prices are in the initial stages of a correction and should decline by 2023, led by prices of dairy and grain products. Falling commodity prices will filter down to intermediate and finished products, bringing relief to businesses and consumers in 2023.

However, labor shortages have accelerated wage growth, and this is contributing to continued inflation, especially in services.

In some sectors, such as construction materials and raw materials trade, where price growth in 2022 was not in line with input cost inflation, margin restoration will be a priority.

It may take several years to steadily reduce inflation rates to the Bank of Albania targets. Consumer price inflation is likely to moderate to an average of 5.5% in 2023, ending the year at a pace of 4.5% year-on-year.

Third, monetary policy tightening should go further towards spring 2023, mimicking the ECB’s policies.

Many central banks in the region, as well as the Bank of Albania, usually subject their policy to ECB guidelines.

We think that based on the current and expected developments for the first months of 2023 in Albania, the basic interest rate should not change after peaking at 2.75% at the end of 2022 [3].

While the European Central Bank (ECB) moderated the size of its rate hike in December, its accompanying guidance was tighter than expected, suggesting that the hike cycle will continue into 2023.

However, with anemic growth one step away from recession already developing in strong economies, recent fiscal tightening, and concerns about a decline in demand will influence future decision-making. By this logic, monetary easing is likely to begin lowering rates in the fall of 2023.

Based on these circumstances, there is little room for a maximum rate with much difference from what is currently determined by the ECB for its members.

Fourth, gross domestic product growth is expected to contract, as predicted by the World Bank, IMF [4] and other organizations [5].

The main driver of expected contractions in real GDP is private consumption, given an acute squeeze on real household incomes due to extremely high inflation. A larger-than-anticipated economic slowdown driven by energy market volatility will remain a potential risk beyond the current winter and spring.

Construction, agritourism and energy are projected to be the fastest growing sectors of the economy in 2023, acting as a counterweight to the incentives and investments made, despite being far from their qualitative and sustainable value potential. This scenario reflects the improvement of growth prospects in agritourism, and tourism services based on early public infrastructure investments, also by the private sector itself, as well as the continuous expansion of energy producers and construction together with its own light-shadows for the source of financing. The agriculture sector and its subsectors, as well as the raw materials and extractive industry sector will continue to benefit from high export earnings, especially for oil, liquefied natural gas (LNG) and chromium.

Based on a portfolio of sectors still limited in the contribution to economic growth if we compare it with the year 2022 and the years before, the Albanian economy already manages to be elastic during the year 2023, but the vulnerability to external shocks will still be the weakest point of her.

The possibility of restructuring the public debt according to the relevant strategy for its management is highly likely to be one of the main policies of the Albanian public finances.

While it happens that in other European countries the housing construction market will continue to weaken in the face of the increase in interest rates, accompanied by the drop in prices, the opposite of the European situation is the peculiarity of the Albanian market, which does not follow the same rule.

For most of the European countries, in response to monetary tightening, interest rates on bank loans will remain elevated until 2023. As a result, consumers who previously locked in low interest rates will choose to stay in their homes. Current and potential new homeowners will be left behind as buying a home is no longer affordable. Recession expectations and the cost-of-living crisis will further dampen demand and push prices lower into 2023, especially in overvalued markets.

In most cities in Albania, beyond high interest rates and a housing market with rising prices, there seems to be no impact like the European market. In the Albanian housing construction market, it is strongly influenced by financing from informal sources and the corruption of building permits [6] and others related to them. These illegal sources of financing give effect to increased prices by at least 5%-10%, as fictitious price increases, which are reflected combined with the effect of increased costs of raw materials, transportation of mechanics and land costs and fiscal ones.

Fifth, regarding the impact of the foreign exchange rate of the main foreign currencies on the Albanian economy, it seems that from all international forecasts the American dollar has reached its peak and will retreat in 2023 but will remain elevated in comparison with previous years.

Buoyed by favorable interest rate differentials and investors’ move to safety, the US dollar appreciated sharply during 2022, reaching highs against the euro and other major currencies before retreating.

These forces that drove it during 2022 seem to lose their effect during 2023, and according to the forecasts of international monetary rating agencies, the dollar is expected to depreciate under the weight of large US current account deficits and low economic growth.

The euro, which has weakened in response to the eurozone’s vulnerability to the effects of the Russia-Ukraine war and prudent monetary policies, will gradually recover.

Meanwhile, it seems that the Albanian Lek will remain at the levels of the beginning of 2023, having a slight appreciation, in the first half of 2023, and why it is known that Albanian exports in this period have an increasing dynamic. A slight appreciation of the Lek at the peak of the summer season is already a sure thing and it will happen with the same cycle in the second half of 2023. Meanwhile, the influence of the foreign exchange market from informal money seems to continue at lower rates than during 2022, but with a constant impact on the Lek’s valuation.

Finally, labor shortages will remain a challenge in 2023 even though unemployment rates are projected to decline modestly.

In the Albanian market, the wave of workers who have moved to Tirana and some large urban centers in the country, coming from rural areas, already seem to aim for an overwhelming part to integrate in the medium term in the labor market in the Capital and its surroundings.

Meanwhile, a large part of the current labor market may continue to move out of Albania, both for long-term residency purposes and seasonally, and will be slow to return, along with a continued slow recovery of migration for employment reasons.

Another exception is the part of Albanians who emigrated during 2022 and before, and since the labor market and the economic and social environment remain far from the standards of the member countries’ markets, they will be included in those countries for 2023 as well.

However, in 2023 the labor market faces even more seriously than in 2022 the risk of price spirals of goods and services and a disproportionate level of wages. This means that the labor market is caught between skills mismatches and slow progress in curbing inflationary expectations.

In closing, what can be said about the economy and well-being in 2023 is the fact that the economy remains quite weird and with surprises that are not simply and only related to the current government and the position of Albania, but to the entire world that surrounds us and has entered in the last decade in the period of miracles.

[1] which includes Albania and other border countries
[2] https://www.spglobal.com/marketintelligence/en/mi/research-analysis/top-10-economic-predictions-for-2023.html
[3] https://www.bankofalbania.org/Politika_Monetare/Vendimet_dhe_Kalendari/

[4] https://thedocs.worldbank.org/en/doc/c7292ee84f0635b28721419e3b367d0e-0350012023/related/GEP-January-2023-Regional-Highlights-ECA.pdf
https://www.imf.org/-/media/Files/Publications/CR/2022/English/1ALBEA2022004.ashx

[5] https://www.ebrd.com/where-we-are/albania/overview.html
[6] https://altax.al/product/kostoja-e-korrupsionit-ne-ekonomi-dhe-ne-cmimet-e-mallrave-trajtimi-i-tij-nga-qeverisja-qendore-dhe-vendore-shoqeria-civile-dhe-biznesi-2022/