Our economic analysis for 2024: More economy and less political selfishness

As the year 2023 came to a close, the Albanian economy is doing better than expected from last year’s forecasts. But it can be said that this pace does not match the expectations of small and medium businesses and citizens. The construction sector together with a part of the services related to the tourism industry avoided a lower development.

Meanwhile, some sectors that produce products for export are growing at an unsustainable rate and uncertainty of high levels for 2024.

Unemployment has been low, but more importantly youth unemployment is high at over double the average unemployment rate. Inflation, is falling although showing a stubbornness and resistance that is aided by high informality and other influences coming from informal money circulating at record levels in 2023.

In general, the Albanian economy exceeded the forecasts of domestic and foreign economists for 2023. For 2024, it seems that economists are showing a cautious approach to the forecasts of economic growth declared by the government at the level below 4%.

Optimistic forecasts lead you to believe that there will be no slowdown in growth, perhaps only a mild development in an economy characterized by lower interest rates and lower inflation.
Forecasts with a more realistic or pessimistic tendency claim from the analyzes made that the economy should be stronger than expected and that interest rate reductions should come faster and be more harmonized with the fiscal policy and stimulus measures for the economy manufacturing.

Meanwhile, in the view of our experts looking to 2024, we judge that economic conditions are expected to deteriorate modestly, although real GDP growth and the pace of earnings of the sectors that performed well during 2023 are expected to remain positive and general inflation is expected to fall to around 3%. But the prices of some products and services will increase, even from the inflated levels of costs within the country, but the rate will be closer to levels consistent with two years ago.

Interest rates, having reached the peak in 2023 (3.25%) will be on the downward trajectory, but not immediately, but perhaps with several stages.

We believe that interest rates will remain above the rate of inflation. This means that savers will benefit in 2024 more than in 2023 from long-term investment and this may return to favor after the last two years which are not considered positive in total. Now, savers can earn positive real returns.

Demographic changes will be the main influencing factor of labor market demand in 2024, as young people will continue to target the foreign labor market and that part targeting the domestic market will continue to be hindered by the non-implementation of the legislation of decent work in the private sector, but also the lack of implementation of the meritocracy of the civil service law.

Meanwhile, pensioners will be under an increased pressure of insufficient living standards. There is likely to be pressure to increase the rate of benefit. The study on the perspective of the pension scheme, which the government says it is completing with the consultancy of the World Bank and the IMF, will probably provide a complete and consistent scheme for the generation that is expected to increase the number of beneficiaries of the public pension schemes. and private.

The damaged supply chains in most of the manufacturing sectors still do not seem to have entered functional normality and evidence of this is the fact that domestic products are not offering hope of a tangible reduction in prices for the consumer.

The economic outlook in 2024 remains uncertain, since if we start by noting the growth prospects for the economy of our trading partners, it seems that they have never been worse, due to the effects of the problems of the systemic crisis that the major European economies are already going through. but also the impacts of conflicts and breakdowns of political stability at a wider level than Europe.

In a more detailed look at the economic and fiscal forecasts for 2024, it seems that the most necessary and valuable addresses to react and take action are:

1. Harmonization of monetary and fiscal policies to moderate inflation.

The downward trend has resumed in 2023 and is expected to continue until 2024. But for inflation to be impactful without many side effects (increases in poverty and living standards as well as business costs) it needs to be studied in detail. a new approach for a New Social Contract in terms of poverty reduction instruments (minimum living policies, etc.), increasing purchasing power by stimulating the productivity of food products and opening a deliberative dialogue with businesses by sector to start a new approach to how businesses are governed and the incentives they need to interact with new market conditions for increased labor and production costs. This means an assistance for them to orient towards a new business model.

Meanwhile, a stylized anti-informality scheme is needed that combines the labor market and the most informal sectors embedded in the fiscal framework based on the inclusiveness of resources and models, since even though the informal sector over the years has mitigated the inflationary pressures coming from demand and financial shocks, already with the advancement of technology, the monetary policy transmission channel should be unblocked to make fiscal policy interventions more effective in stabilizing inflation. The channels through which the fiscal policy should work are the higher flexibility that should be offered by the labor market and the reduction of the cost of lending (given that the informal sector is excluded from the credit market).

If these actions are not implemented fully and in time then the monetary policy will not be effective. This is why it is important that in 2024 the vanguard of the implementation of the anti-inflationary policy should be the fiscal policy, since the reaction scheme from the Bank of Albania has largely consumed all the actions implemented to influence inflation.

2. Mobilizing domestic and foreign resources to increase the use of the economy’s potential through its structural reorganization and without damaging the environment.

We expect real GDP growth to walk the line between a slight expansion and contraction for most of next year. After real GDP growth of 3.8% (better than expected in 2023), we forecast a below-trend expansion rate of 2.8% in 2024. Among the main components of GDP, consumer spending is likely to grow by a smaller pace in 2024, while fiscal expenditures may fluctuate from a positive contributor in 2023 to a modest drag due to the loss of the elasticity of the public sector in being efficient, but also due to unexpected various related shocks from external and internal factors will force the government to react against its will to unforeseen resource allocations.

Declines in business investment and construction activity in 2024 will set binding conditions for their upward performance in 2024.

Meanwhile, even if the credit outlook remains muted amid current high interest rates, 2023 strength in the services sector is likely to see modest growth.

Everything we analyze needs the commitment of energies and policies towards investments in education and facilitating conditions for the massive introduction of technology in the private sector, as well as the creation of conditions for the interconnection of innovative sectors towards this technology. All this initiative belonging to the private sector should be stimulated by public policies aiming at mobilizing the resources of the two sectors to be a complementary part of each other.

Initially, resource mobilization means releasing blocked or unused resources as and when needed.
The whole process needs to be coordinated and organized with new policies that do not continue to have an optimistic and slightly realistic approach, making it clear who are the essential resources for the development, implementation and continuation of the work to achieve the national mission, that of economic integration. In other words, resource mobilization means expanding relations with resource providers, skills, knowledge and capacity for their proper use.

An important moment is the analysis related to the weakest annual real GDP growth rates in the last two years.

The analysis should be carried out as a critical opposition as the result of a forced economic growth seems to have caused consequences on the environment and natural resources. In the name of economic development, the government and mostly big businesses along with their network have benefited by undermining the effects of the sustainable model and in function of inclusive economic development.

Over the last few years, environmental concerns have begun to grow from civil society and environmentalists, appearing even with new ideas of economic growth in parallel with environmental protection. Thus, e.g. the anti-environmental and even economically unjustified decisions of the ministry responsible for energy policies have acted negatively in this direction. Sustainable development must be achieved through environmental hygiene.

3. Not allowing the further devaluation of the Euro, the US dollar, etc.

If they are not addressed towards the imminent solution of the problems of the large supply of foreign currencies in the country’s free monetary market, the chances are that even in 2024 their devaluation will be reinforced. But, beyond the acute problem that creates deep holes in the economy and the labor market, it will probably be followed by the increase in social pressure for unemployment that will be created as well as the need that will arise to be borne by the budget according to the legislation in force .

Meanwhile, the devaluation of the main currencies (the euro and the US dollar) will have a partial economic effect in a relative increase in real growth (exports of goods and products) and inflation, as well as an excess of the current account deficit, which as part of her. GDP will create instability for other sectors.

The biggest impact will be given by the category of exporters who have raw materials to order (patterns) and who need to be oriented, assisted and have as a way out scenario for other sectors that can be in all conditions in . 2024.

4. The fiscal stimulus in 2024 should be greater than expected for the Albanian economy.

Although the budget deficit in fiscal year 2024 is predicted to be at the level of 2.5% of GDP and the public debt is intended to be below the level of 60% of GDP, it should be aimed that this objective is not based on the same decisions as in the year 2023 (non-completion of public expenditure and increase of tax revenues disproportionally between sectors).

The goal of fiscal policy during 2024 should be higher tax revenues, but not based on only a few taxes and a narrow tax base.

In contrast, a fiscal stimulus is needed where it will be seen by direct measurements of the economy and households. The stubborn fiscal policy so far has failed to generate sustainable revenue growth and has relied little on narrowing evasion.

If the policy of fiscal incentives for the sectors of the economy and families should be pursued, sustainable income should be aimed at by increasing the tax base of individuals, by increasing the burden for capital taxation, for wealth tax, expanding the base for social contributions , for national taxes mainly on natural assets and narrowing the burden of consumption taxes in exchange for expanding their base by narrowing the territories of informality.

Meanwhile, if the performance of administration (good administration) increases by at least 5% and the reduction of corruption, a fiscal contribution to the budget would be achieved much closer to the principle of tax justice and towards an increase in voluntary compliance.

While the on-time execution of budget expenditures should return to the primary performance measurement of ministries and institutions, as the increase in administration salaries should be understood precisely through the increase in the performance of execution of expenditures in the anticipated time and with an impact on the reduction of denunciations of corruption.

We expect the budget deficit to meet the Ministry of Finance’s target, reflecting both belt-tightening on the expenditure side partially offset by higher interest costs on government debt and mainly the increased cost of wages. Meanwhile, in this deficit, the different pressures on the budget should be taken into account, which may come from the unexpected that are accompanying the economies of the countries today.

5. The labor market is showing signs of normalization by the end of 2023, but unemployment may go higher in 2024, while remaining low in the historical context.

The momentum in the labor market has begun to fade with the government’s decisions about its employees, as well as the decision-making by businesses to increase wages and modestly reduce unemployment, as well as reduce the rates of leaving work and temporary help. Rising labor force participation and increased immigration patterns over the past year have increased labor supply, while rising labor costs moderate labor demand. Given the challenges of adding and retaining workers who replace departures and moves from one sector to another, businesses may be more reluctant than normal to lay off workers in an economic environment of slowing growth.

However, less employment activity may be enough to push the unemployment rate higher in the youth segment by the end of next year due to an influx of workers from abroad. The already slowing real benefits of increased wages may slow further in the context of a more disoriented labor market that does not meet the demands of new workers for technology-based productive activities.

The current employment promotion policies of the government should take into account exactly these trends and provide a formula for cooperation with the various sectors that encounter problems. This coordination and organization should be complete by the beginning of the year. But even if it closes at the end of spring, it can serve in the direction of the service sectors related to tourism and information technology, and it should target exactly those sectors that target young people, reorienting in this case also the policies of professional education and the fulfillment of promises for the increase in teaching practice and especially the increase in spending on research and development.

6. Hot spots in the supply chain are mainly needed to be repaired, while restructuring of the supply chain must take place as the strengthening of some oligopolies is distorting competition and affecting the slowdown of economic growth.

Over the past year, as in years past, as raw material, freight and transportation costs have fallen, supply chain considerations must shift from short-term tactics to long-term cost minimization strategies while ensuring resilience and adaptability. according to new models of doing business.

Legislation passed in 2023, including a number of legal acts expected to be passed during the first half of 2024, should also be seen with consideration to provide incentives for several strategic industries including renewable resources, food production and the promotion of electronic and software products.

This would result in increased business investment in high-tech production structures. Our expectation is that supply chain adjustments should continue at an accelerated pace, as even the simplest changes are costly and complex.

7. Increasing fiscal pressure in the real estate sector.

The fiscal environment of the current taxation rates has influenced the real estate sector to feel favored in relation to labor taxation. This happens in all types of real estate, both residential and commercial. In this case, even though the new law on wealth taxation is expected to enter into force in 2026, a commitment of local government resources is needed, with a much stronger support than before from the central government to achieve an expansion of the future basis of wealth taxation, but also to increase the fiscal contribution from wealth during the year 2024 by setting concrete and achievable objectives for the fiscal burden from this very important tax, but neglected by the government and in favor of the corruption of officials of different levels.

We do not expect this to be a systemic issue, but in the meantime we anticipate that local budget revenues should realize in implementation that this is the premise of possible resource losses to overcome some of the economic obstacles created by inaction and corruption .

8. Geopolitical risks will remain to a greater extent influencing part of the economy

The tensions raised between Kosovo and Serbia, but also in other countries of the Western Balkans, as well as the continuation of the Russia-Ukraine war and the conflict in the Middle East show all the ongoing uncertainties and risks for 2024 and maybe beyond. While the direct economic impact has been limited so far, the biggest risk is for a supply shock related to the imports and exports that businesses and public enterprises conduct with directly exposed countries.

The entire impact is related to the further weakening of the circulation chain and the extension of the restructuring of the economy. Next year’s general elections in 2025 may be more influential than recent geopolitical influences given the ambition of the socialists to continue their journey to power even as they clearly show signs of fatigue and tiredness with power and the multiple benefits that they have come from the unusual 10-year government.

In summary, as stated above, we think that all these measures, if they are started, strengthened and performed in harmony with each other, will be a very big step in the direction of:
– The necessary improvement of the environment for business to catch a higher rate of convergence with the EU and OECD levels;
– Strengthening and standardizing the skills of employees and sectors directly affecting the performance of indicators with a medium-term objective to reach levels above half of the EU and OECD average;
– Finalizing progress towards convergence in infrastructure leaving room to increase social spending and directly consumption;
– Increasing performance in terms of digitization by investing also in the connection between the public and private sectors to reach EU and OECD levels.

If the government will continue to focus only on the political approach in order to win the next elections and will not give up political selfishness, our thoughts conclude that the expectation for the expansion of economic activity will end like a midsummer night’s dream, which which is projected to translate into lower annual economic growth in 2024.