BRUSSELS, Oct. 8 – Available data on Albania, the country that has been the least affected by the crisis so far, suggest that growth continued in the second quarter, after having increased by 2 % of GDP in the first quarter of 2010, according to a European Commission report on candidate and pre-accession countries published last week by the EC Directorate-General for Economic and Financial Affairs.
In spite of this, current account deficits in the second quarter remained high in Albania (-11%) and Montenegro (-29%), representing a continued source of macro-economic vulnerability. Monetary policy developments were rather diverse.
Monetary policy gradually continued to be eased in Iceland and Albania, and remained accommodating in Croatia.
Key Developments
On the back of a weaker-than- projected half-yearly revenue performance, the government revised its macroeconomic fiscal framework and budget for 2010 (adopted by parliament on 19 July). The budget re-balancing aims at reducing the deficit to 3.1% of GDP against a lower expected economic growth of 4.1% in 2010. The lower budget deficit is planned to be achieved through expenditure restraint. Compared to the original budget, current spending is planned to be reduced by 0.8 percentage point of GDP, while capital outlays are expected to be 1 percentage point lower. This is expected to neutralize revenue which has also been revised downwards by the same amount.
Real Sector
Leading indicators suggest that the recovery that was recorded in the first quarter of 2010, when GDP grew by 2%, continued in the second trimester. Economic sentiment indicators published by the Bank of Albania show that all sectors of the economy recorded an improvement, with confidence in the services sector posting above-average results. In contrast to a contraction in the volume of retail sales in the second quarter of 2010, consumer confidence also improved sizeably on account of better consumers’ financial situation and general economic development expectations.
Labour Market
In the second quarter of 2010, the number of persons registered as employed increased by 4,175, compared to the first trimester. Almost all of this increase was generated by the non-agriculture private sector. Public sector employment grew marginally, while jobs in
agriculture remained unchanged. The number of registered unemployed increased slightly. As the net impact of these developments is negligible, the unemployment rate stood at 13.8% in the second quarter of 2010, unchanged from the previous two quarters. During the second quarter average public sector wages increased by 6.7% (year-on-year).
External Sector
In the first half of 2010, the current account deficit narrowed by a notable 28%, year-on-year. This improvement was sufficient to reduce the current account deficit for the four quarters to Q2 2010 to EUR 1.2 billion from EUR 1.4 billion in the corresponding period a year earlier.
The decline in the current account deficit in the first half of 2010 was primarily due to a lower merchandise trade gap. This was a result of higher foreign sales of goods in all categories but was mostly pronounced for electricity exports and construction materials. Electricity exports benefited from a rebound in energy prices as well as full capacity of the local hydropower generation. Imports of goods rose at a modest pace, reflecting the normalisation of imported machinery and equipment from the exceptional levels reached in the corresponding period of the previous year.
Monetary Developments
In the third quarter, the annual growth of the monetary aggregate M2 continued its downward trend reaching 3.8% in August.
Following a peak of 4.4% in February, largely due to higher utility tariffs, consumer prices fell back within the Bank of Albania’s target band of 3% +/- 1 percentage point. Inflation stood at 3.5% in August 2010. The decline primarily reflects lower food prices, helped by the arrival of local seasonal foodstuffs, as well as a continued fall in clothing and footwear. Due to its sizeable weight in the CPI, the decline in the food index offset the significant price increases in healthcare and alcohol and tobacco, the latter owing to higher excise duty rates.
Financial Sector
In the second quarter of 2010, interest rates on deposits broadly continued the downward trend started in the final quarter of 2009. The decline has been more pronounced for longer-term deposits with the 60-month interest rate falling by 70 basis points in June compared to May 2010. The cost of short-term borrowing in lek (one year or less) also declined during the second quarter of 2010. The 6-month interest rate, displaying the highest drop, stood at 12.8% in June, down from 16.4% in May. The decline in the average yield of 12-month Treasury bills which started in November 2009 continued, reaching 7.9% in August 2010.
