UNIQA Capital Markets Weekly

Albania
• Socialist Party captured a victory in last week’s general elections.
• Opening of EU accession talks remains ahead, but economic reform effort still to do after some progress.
• Meanwhile, the economy maintains a solid expansion.

On Sunday 25th June, 1.4 million Albanians voted for a new government for the next four years. The Socialist Party (PS) lead by Edi Rama took 49.5 % of the votes, well ahead of the centre-left Democratic Party (PD) that gathered 29.1 % of the votes. The registered turnout of the vote was quite low (45.2 %).  The PS came out first in 10 out of 12 election zones and will take 74 of 140 seats in the parliament, while the Democrats get 43 seats and the third strongest party, the Socialist Movement for Integration (LSI) won 19 seats. The outcome means 9 more seats for the PS, while PD lost 7 seats compared to the last elections in 2013.
Rama can now be expected to run the country as prime minister for another four years and the PS would be able to run the country without sharing power in a coalition with smaller parties.
Important reforms lie ahead of Albania including the opening of EU accession talks and enhancing the rule-of-law in the corruption-ridden country.  Albania concluded a three-year IMF-supported program in February that was aimed at restoring economic growth and controlling the rapidly rising debt that had threatened the stability of the economy. The budget deficit declined to 1.7 % in 2016 and public debt peaked at 73.7 % in 2015 and started to decline afterwards. In its statement (as of 28th February), the IMF also honoured the reform of the pension system and the electricity sector, that became less reliant on budget support. On the other side, the IMF stressed that continuing effort is needed to lower public debt and borrowing cost further, to reform the tax system (property tax and reduction in tax exemptions), to increase the efficiency of public financial management and tax administration and, finally, to press ahead with the reform of the justice system.
Meanwhile, the economy maintains solid expansion. Growth in expenditure remains solid including household consumption, fixed investment and net exports. The construction activity is a main driver of growth in the economy. The labor market shows signs of improvement.
Growth in real GDP accelerated to 0.9 % (q/q) and 4.0 % (y/y) in Q4 2016. Household consumption expanded healthy by 2.5 % (y/y) after 1.6 % previously.  Fixed investment rose again strongly (5.5 %) as well as exports (14.0 %), while imports fell by 0.3 % (y/y).
On the supply side of the economy, gross value added in agriculture increased by 2.0 % (y/y), industrial production and construction rose by 5.1 % and by 6.8 % (y/y). In addition, wholesale and retail trade (5.7 %), information and communication (4.3 %) and financial services (8.3 %) exhibit strong expansion.
The construction sector has been one of the main drivers of growth in Albania (Figure 1). The construction index rose by 24.2 % (y/y) in Q1 2017. On the other side, the manufacturing index declined by 0.7 % (y/y) in Q1.

The labor market is improving (Figure 2). The unemployment rate sank to 14.6 % in Q1 after averaging 15.6 % last year. Total employment has been expanding strongly in 2016 and rose by 2.8 % (y/y) in Q1 2017. Moreover, wage growth accelerated to 4.1 % (y/y) in Q1 2017 from lower growth last year.

In recent months, consumer price inflation rose compared to last year, while the trend reverted gradually since April. In May, the inflation rate was by 2.0 % (y/y). In the banking sector, total credit stagnates due to a decline in corporate loans (-5.0 %), while household loans show solid increases (3.3 % y/y in April).

Eurozone
• June Inflation below its short-term peak early this year.
• Persistence and prudence in monetary policy normalization to be expected.

According to the flash estimate released last Friday (Figure 3), the Eurozone headline inflation rate was 1.3 % (y/y) in June (after 1.4 % in May). The core inflation rate (excluding volatile energy and food price segment) rose from 0.9 % to 1.1 % (y/y) and more than had been expected by inflation analysts (Bloomberg consensus: 1.0 %). We expect annual average headline inflation of 1.6 % for 2017, although the recent fall in the Brent oil price (47.8 USD/bl) from a peak in May (54.2 USD/bl) might pose small downside risks to the expected value.
In its June policy meeting, the European Central Bank (ECB) had lowered its staff inflation forecasts. The ECB forecast 1.5 %, 1.3 % and 1.6 % annual inflation in 2017, 2018 and 2019, while in March the projections were 1.7 %, 1.6 % and 1.7 % over the forecast horizon. With respect to the core inflation rate, the ECB forecasts 1.1 %, 1.4 % and 1.7 % for 2017-19, while previously the forecasts were 1.1 %, 1.5 % and 1.8 %. The slow path towards the central bank’s inflation objective reflects President Draghi’s call fur “persistence” and “prudence” in monetary policy and a very gradual approach of monetary policy normalization.