Annual target of 2% growth at risk, as economy shrinks in second quarter

The shrink in the second quarter of the year means the Albanian economy has grown by only 0.56 percent in the first half of 2014, which is the worst performance in the past six crisis years, and that the road to recovery for the Albanian economy will be long and require key reforms.
By ERVIN LISAKU
TIRANA, Oct. 7 – At a time when the Albanian economy seemed to have overcome its sluggish growth in the past two years, it suffered a major unexpected setback in the second quarter of this year when it registered negative growth rate, putting into doubt the 2 percent growth target both the government and the IMF have set for 2014.
Data published by the country’s state statistical institute, INSTAT, this week show the Albanian economy registered negative a growth rate of 0.61 in the second quarter of this year affected by poor performance in the long-ailing construction sector, transport and industry. The quarterly shrink which is the fifth since the onset of the global financial crisis in 2009, signals the road to recovery for the Albanian economy will be long and require key reforms.
In the first quarter of 2014, the Albanian economy grew by 1.7 percent year-on-year, and indirect data about the second quarter of the year suggested both domestic consumption measured by VAT and private investments measured by imports of machinery, equipment and spare parts, registered significant growth rates.
The shrink in the second quarter of the year means the Albanian economy has grown by only 0.56 percent in the first half of 2014, which is the worst performance in the past six crisis years.
Newly revised data also shows the Albanian economy grew by an average of 2.6 percent annually during the 2009-2013 crisis years compared to a pre-crisis decade of an average 6 percent, being one of the best performers in the region, according to INSTAT.
Earlier this year, INSTAT revised the GDP for 2013 upward to 1.42 percent, up from an earlier 0.44, giving a wrong impression of 2013 as the worst year in Albania’s economy. Revised data shows the Albanian economy grew by 3.7 percent in 2009, 3.75 percent in 2010, 2.17 percent in 2011 and only 1 percent in 2012.
Agriculture, which has proved the most stable sector in the past five global crisis years, continued positively performing even in the second quarter of 2014 when it grew by 3.18 percent year-on-year and 1.59 percent compared to the first quarter of 2014. Despite employing around half of the country’s population, the agriculture sector accounts for only 22 percent of the GDP and is also one the least financed sectors of the economy, unveiling the poor productivity of this sector. The “agriculture, forestry, fishing and hunting” sector had a positive contribution of 0.95 percent to the annual GDP growth rate in the second quarter of the year.
The industry sector shrank by 1.29 percent year-on-year in the second quarter of the 2014 but was up by 1.41 percent compared to the first quarter of the year, affected by a sharp decline in the wholly hydro dependent domestic electricity generation. Prolonged drought in the first half of this year severely affected the country’s domestic electricity generation and electricity exports but grid losses in the now 100 percent state-run electricity distribution system suffered a moderate decline, according to a report published by INSTAT.
Electricity generation and distribution, which is currently undergoing a reform to reduce annual losses of around $200 million, had a negative contribution of around 1 percent to the GDP in the second quarter of the year.
The long-ailing construction sector suffered a sharp 22 percent shrink in the second quarter of the year and was down by 8.5 percent compared to the first quarter of the year. Construction had the highest negative contribution to the GDP growth for the second quarter of the year at 2.8 percent. Declining remittances, tighter lending standards on home loans and lower number of construction permits have considerably affected this sector which used to be one of the key drivers of Albania’s growth in the pre-crisis decade.
“Trade, hotels and restaurants” grew by 7.1 percent year-on-year in the second quarter of the year and was up by 2.6 percent compared to the first quarter of the year.
The transport sector registered a sharp 23 percent shrink in the second quarter of the year, affected by air transport, and was up by 2 percent compared to the first quarter of the year while post and communication was down by 1 percent.
Other services which include public services and the financial sector registered a 4.55 percent growth in the second quarter of the year. Within this group, the real estate sector, legal and commercial services suffered a decline.
INSTAT data shows the services sector accounted for 52 percent of the GDP in 2012, followed by agriculture with 21.8 percent, industry with 14.4 percent and construction with 12.2 percent.
INSTAT’s director Gjergj Filipi attributed the shrink to the positive performance in the second quarter of 2013 ahead of the June general election when public investments soared, but stressed the Albanian economy was on track considering that it grew by 0.38 percent compared to the first quarter of the year.
Meanwhile, the opposition Democratic Party accused the Socialist Party-led government of being responsible for plunging the country into crisis.
“The government-controlled INSTAT has published the results on the performance of the Albanian economy for the second quarter of 2014, reconfirming what Albanian households and businesses say every day,” said opposition Democrat MP Ridvan Bode, a former finance minister.
“The shrink of the GDP by 0.61 percent, compared to the 2 percent target government has set, is a bad omen for the further progress of the Albanian economy,” added Bode.
Lending back to positive growth rates, a slight recovery in domestic consumption and private investments, budget revenues up by double digits and the clearance of arrears progressing are positive signals that the Albanian economy is heading toward moderate recovery in the second half of 2014 after growing by an average of 1.2 percent in the past couple of years. However, public debt at around 70 percent of the GDP, bad loans at around a quarter, exports having dropped to a single-digit growth, deteriorating competitiveness on a regional and global level and huge deficits in the pension and energy system continue posing significant threats to the country’s economy and public finances.