There is doubt that the global economy is expected to enter recession. This fact is generally accepted by all governments of developed countries. The warning of a "difficult winter" is being repeated in every statement of the international economic organizations. The rising prices of raw materials, the energy crisis, the war in Ukraine and the diseases that the pandemic crisis inflicted on the world economy, constitute a very dangerous mix for the next two years.

The Board of the US Federal Reserve has made it clear that curbing inflation is its main goal. However, the price increases are mainly due to external factors, such as the scarcity of raw materials, and even the synchronized interventions of the central banks and their monetary policies hardly seem to control them. Supply chains in the industrial system proved unprepared for such a rapid post-pandemic return to business activity in manufacturing, consumer demand for goods and services, and free movement. This shortage was primarily associated with the increase in consumer prices.

The energy crisis we are experiencing now began to incubate when the amount of its products offered on the international markets gradually began to decrease (including the recent OPEC decision to reduce production). Many countries stopped extracting oil, gas and fossil hydrocarbons because of obstacles that made it uneconomical for business. On the other hand, after the endless injection of liquidity in the past years, the Central Banks "do not have the courage to increase the monetary supply". They come after a period of "great monetary floods" due to the pandemic. Thus, after more than 20 years, inflation is showing very worrying signs. Therefore, they only have to take actions related to limiting the demand for currency and consequently reducing inflation. Rising interest rates are the main lever for this problem.

However, the increase in interest rates at this moment is also a "double-edged knife", because it leads to a reduction in consumption to balance the shortages, but does not limit the increase in the cost of production that stimulates the increase in the prices of raw materials. Today, in the conditions of inflated borrowing, the increase in interest rates leads to an additional burden of the cost of production, due to the increase in financial costs. It looks like "the dog wants to bite its tail and spins in place". The challenge is how much the government financial policy makers and the monetary levers of the central banks will find ways to limit the rise in prices while avoiding a rapid economic decline. So the question arises: Can they reduce demand enough without causing a recession? And how hard is that?

IMPACT OF REDUCED LIQUIDITY AND ECONOMIC POLICY ALTERNATIVES OF DEVELOPED WESTERN COUNTRIES

Liquidity is one of the first, if not the first, elements that investors look at, especially in this situation. This applies both to the stock and bond market, as well as to other sectors of the economy. Until now and for several months, the Fed (and then other central banks) have engaged in increasing the interest rate; in the opposite action of what they have done in recent years. From the tendency in every case to inject liquidity into the system, now, realizing that they have overdone it, they try to withdraw this liquidity. Many good ideas turn bad when the tools become redundant and over the limit. Liquidity "turned from a medicine into a drug".

Ever since Alan Greenspan was chairman of the Fed, the world has become accustomed to extremely low interest rates and excess liquidity. The return to a tighter monetary regime has side effects. This is a difficult and often painful transition. In the US, the markets and economy in general, dependent on abundant and cheap money, are now showing signs of abstinence from investment and difficulty in increasing consumption. Investors are reacting like a drug addict who is taken off his dose and suffers without it.

Before the crisis spreads to the rest of the economy, according to Bloomberg data, the venture capital index is now at 62% of its highest level, hitting a new record low, not far from where it was at the height of the pandemic panic in March 2020. The Eurozone is facing an even deeper recession than previously predicted after the war in Ukraine and gas supplies brought the locomotive of the European economy, Germany, to its knees. According to Deutsche Bank economists, GDP will shrink by 2.2% next year, compared to a previous forecast for a contraction of 0.3%. Meanwhile, inflation looks set to average 6.2% in 2023, up from 8.2% in 2022.

All this because German industry has constant supply chain disruptions, labor markets are tight and a weak euro cannot compensate for the impact of the worsening economy. Deutsche Bank still expects the European Central Bank to raise its deposit rate above 2.5% by the end of the third quarter. In its latest assessment of the global economy, the IMF highlighted the fact that "for many people in 2023 there will be a real decrease in income and for many businesses the decrease will be very significant". For this reason, it has lowered its economic growth forecasts due to the impact of the Russian occupation of Ukraine. The body predicts that global growth will slow to 2.7% next year, 0.2% lower than the July forecast.

The International Monetary Fund has warned that "the worst is yet to come" for the world economy, as the war in Ukraine continues and prices will continue to rise. In macroeconomic terms, it is thought that one third of the global economy will see two consecutive quarters of negative growth, while the three largest economies, the United States, the European Union and China, will continue to slow down their development rates. These projections are based on three main events currently holding back growth: Russia's invasion of Ukraine, the rising cost of living, and China's economic slowdown. Together, they create an "unstable" period economically, geopolitically and ecologically. Food prices have increased significantly in all Western European countries, but also in developing countries.

The IMF predicts that global inflation will peak in late 2022, rising from 4.7% in 2021 to 8.8%. Global inflation is likely to decrease to 6.5% in 2023 and to 4.1% by 2024. This forecast is based on constant current factors and does not take into account the possible surprises of geopolitical changes. The agency noted that it is necessary to deepen the tightening of monetary policy around the world to fight inflation and the "strong appreciation" of the US dollar against other currencies. The war in Ukraine continues to "strongly destabilize the global economy" and according to all the latest information, it has caused "a severe energy crisis in Europe", along with the destruction of Ukraine itself.

The price of natural gas has more than quadrupled since 2021, as Russia now supplies less than 20% of 2021 levels. This trend has been joined by the grain and chemical fertilizer crises, both of which are putting significant pressure on supply, on the increase in production costs and above all in the competitiveness of goods produced in the EU. For market specialists and the economies of developing countries, the shocks of 2022 will "reopen the economic wounds that were only partially healed after the pandemic", says this same report. "The winter of 2022 will be challenging for Europe, but the winter of 2023 is likely to be worse."

Gas shortages, very expensive electricity prices across Europe, are seen as a product of the Merkel government's faulty deal between Germany and Russia a few years ago. In many countries, actual inflation rates have doubled forecasts.

While all this is happening in the world economy, Albania, as part of it, presents its own problems. Only in the last two weeks, the IMF mission made another visit to Albania, a detailed analysis of the Albanian economy was made on the eve of the discussion of financial and monetary policies that will materialize in the new budget for 2023. SWOT analysis of the factors that will be necessary for the construction of economic policies that stimulate overcoming the difficulties of the current and expected global and national crisis.

SOME STRONG POINTS OF THE ALBANIAN ECONOMY

1. The Albanian economy is almost entirely independent of Russian gas and the impact of its price directly on consumers is considered relatively negligible. The increase in the price of fuels remains an isolated phenomenon in terms of the chain reaction that gas has brought to the industry of European countries, despite the fact that it hits family budgets and businesses related to transport. The hope that winter will increase the possibility of domestic electricity production limits the threat of rising energy prices.

2. The Albanian economy, according to many experts, recovered most of the damage caused by the earthquake and pandemic by reformatting the investment capabilities of private businesses, especially those in the construction and tourism sectors. These two sectors had the largest growth since 2002.

3. This year, Albania had a new record of tourist visitors and a significant increase in the service sector, especially in the third quarter of this year. It is thought that this stimulated the labor market and pressured the wage level.

4. Albania had a significant drop in the level of unemployment despite the fact that this phenomenon has its controversial elements, which will be analyzed in terms of threats.

5. The Bank of Albania is using the monetary policy correctly and has managed to keep the exchange rate under control, and the fall of the euro has not put inflationary pressure on imported goods, on the contrary, it has limited the increase in the prices of these goods.

6. This year, the Albanian economy managed to curb the growth rate of the public debt, a consequence of the packages during the pandemic, and created a current budget premise for selected interventions for special layers of society.

AND SOME WEAK POINTS

1. The fight against informality and the "underground" economy remains one of the weakest points of the Albanian economy. The reforms announced in this direction have not yet produced the expected results and the restructuring of the reformed justice system still requires time to guarantee the expected efficiency of its operation.

2. The tax system, although there have been large investments with the implementation of the fiscalization project, has not yet managed to perfect the electronic control of entities and natural persons. The expected income this year from this process is far from the target. It is very important to create qualified personnel to use the control systems as well as possible outside of the potential corrupt practices that the system itself carries.

3. A weak point of the Albanian economy is the high public debt and the deepening of social inequality. Despite the fact that the public debt has changed towards growth rates, it still remains very high and above all due to the conditions of the world economy (increasing interest rates) the cost of its service will be a heavy burden for it all. Restructuring the public debt and above all reducing it as quickly as possible paves the way for a more sustainable development and above all narrows the deepening of social inequality.

4. A very important element is the lack of foreign direct investments. This is a problem related not only to the change in the business climate, but also to the confidence that foreign investors have in the Albanian economic system.

SOME OF THE THREATS TO OUR ECONOMY

1. The growth of the construction branch and especially the increase in real estate prices in our country is a serious threat to the entire Albanian economy, if this phenomenon is not managed carefully. According to the observations of the World Bank and INSTAT, the areas of permits have increased significantly and the real estate market has expanded, especially in the capital. According to the Fischer Index of House Prices, calculated by the Bank of Albania, the average price of houses sold during the first 6 months of 2022 has increased by 28.4% compared to the previous 6 months and by 39% compared to a year ago. This is the highest 6-month increase of this index since 2013, when the Bank of Albania started its calculation. Compared to the base period, the housing price index has increased by approximately 110%.

2. The International Monetary Fund (IMF), in the last statement for Albania, urged caution regarding the impact that the momentum of construction and the expansion of the real estate market can have on the stability of the financial and banking sector.

3. In recent years, we have seen a decline in the competitiveness of the indicators of the Albanian economy and, above all, a weakening of the climate for doing business. The representatives of the IMF and the World Bank have repeatedly emphasized that the continuous investment in regulatory and structural reforms, which promote and encourage the macroeconomic stability of the country, the improvement of the business climate, the increase of efficiency and competitiveness, the improvement of human capacities, as well as comprehensive infrastructure development, is the only path to faster economic and social progress.

4. The continuous emigration that Albania is going through, in addition to reducing the average age of the population, has created significant shortages in professions and certain segments of the labor market. The figures on the decrease in unemployment should not create false illusions because the increase in the decrease in unemployment is lower than the rate of employment of new employees.

OPPORTUNITIES

1. Many experts, as well as representatives of the IMF and the WB, supported the change in the course of the monetary policy undertaken by the BoS, despite the successive increases in the interest rate. They are of the opinion that the banking system has withstood the successive shocks well, supported by the continuous efforts of BH to strengthen regulation and supervision, in accordance with EU standards, which enables the provision of tools to better manage financial stability risks.

2. Showing determination in the further continuation of efforts towards the de-euroization of the economy, as a necessary measure for a better transmission of the monetary policy and the preservation of financial stability, the Albanian economy has all the conditions to use effective financial levers for the war against inflation. It has the monetary space to help the Ministry of Finance surgically intervene with social policies in the layers most exposed to the crisis of the Albanian society.

3. Everyone agrees with the policy of the Bank of Albania that inflation continues to remain a major challenge for macroeconomic stability and sustainable growth of the country. Inflation has increased significantly, but is expected to decrease during 2023 and taking measures to mitigate and return it to the target is the main focus of the work of the Central Bank. Forecasts of inflation rates are promising for the future. The normalization of the monetary policy has been necessary to soften this indicator, while there has been an increased vigilance towards higher interest rates to maintain financial stability. The consolidation of the banking sector, the improvement of the credit environment, the all-round development of the financial markets, have brought significant qualitative improvements in the stability and efficiency of the banking sector.

4. Finally, Albania still has opportunities to improve structural reforms, especially tax and fiscal reforms in order to better achieve the budget revenue objective. The GDP estimate for this year remained stable, growing at 3.2%, despite representing a decline from the 6% that was in 2021. Next year's budget is perhaps one of the most important moments of the government's economic and financial policy. and to have an optimal harmonization of the monetary policy with the financial and budgetary one (as an important principle even more so in a crisis situation), which means between the policy of increasing the interest rate, the stability of our national currency - the lek, and the tax policy (in times of crisis there can be no increase in taxes, but an improvement in fiscal administration) and reprioritization of expenses that take into account the effects of the last two crises, the restructuring of the economy and the budgeting (support) of the needy classes on the one hand and keeping public debt and budget deficit under control on the other hand.

(*Academician, economy expert, ex minister and SP MP; Panorama, Oct. 18, 2023)