Albania, second to last in the region for economic growth as investment slows

Albania recorded the second-lowest economic growth in the Western Balkans in the second quarter of 2026, ahead of only Bosnia and Herzegovina.

According to the European Commission’s latest economic report on candidate countries, Albania’s economy expanded by 3.6% year on year, matching the region’s weighted average, which marked its fastest growth since the second quarter of 2024.

While most economies in the region accelerated, Albania saw a slight slowdown, from 3.7% in the first quarter to 3.6% in the second.

The slowdown in investment was particularly notable: investment grew by just 1.8%, down from 4% in the previous quarter, while other countries in the region recorded an acceleration.

“Investment growth continued to slow, falling to 1.8% year on year, from 4.0% in the first quarter of 2026 and 9.9% in the fourth quarter of 2025, but remained above the 0.6% recorded a year earlier,” the report says.

According to the European Commission, economic growth in the Western Balkans was driven mainly by household consumption and investment.

Albania had the region’s strongest growth in private consumption, at 4.6% year on year, followed by Kosovo at 4.4%. Consumption growth was supported by strong wage performance, which continued to boost domestic demand.

Investment trends, however, paint a different picture. Albania was the only Western Balkan country where the growth rate of gross fixed capital formation slowed in the second quarter of the year.

By contrast, North Macedonia and Montenegro recorded significant investment growth of 16.5% and 26.5%, respectively, driven mainly by increased public capital spending.

Albania improves its external position, tourism supports surplus

Despite its relatively slower economic growth, Albania was among the countries that contributed most to improving the region’s external position.

According to the report, Albania’s current account balance, measured over the previous four quarters, moved into a surplus of 0.2% of gross domestic product in the second quarter of 2026.

The improvement was supported by growth in service exports, particularly tourism, as well as a better primary income balance, partly due to higher earnings from short-term and cross-border work abroad.

Albania was also among the countries where foreign exchange reserves increased most significantly compared with a year earlier.

At the regional level, the weighted average current account deficit, measured over the previous four quarters, narrowed to 4.6% of GDP, 0.8 percentage points lower than a year earlier.

The improvement was driven mainly by Albania and Serbia. In Serbia, the current account deficit fell from 5.5% to 4% of GDP, thanks to growth in vehicle exports and remittances.

By contrast, North Macedonia’s deficit widened by 1.3 percentage points to 4.9% of GDP, as remittances declined and the goods trade deficit increased.

Montenegro continued to have the region’s weakest external position, with a current account deficit of 20.9% of GDP, up from 18% a year earlier.

Net foreign direct investment as a share of GDP was lower than a year earlier in most of the region’s economies. It ranged from 1.8% of GDP in North Macedonia to 6.4% in Kosovo.

According to the European Commission, only in Albania and Kosovo did foreign direct investment cover more than two-thirds of the current account deficit.

The Western Balkans accelerates growth, with North Macedonia leading

The Western Balkan economy grew by an average of 3.6% in the second quarter of 2026, up from 3.2% in the first quarter, marking its fastest expansion in two years despite a challenging external environment.

The acceleration was driven mainly by Serbia, the region’s largest economy, where growth reached 3.8%, up from 3.2% in the previous quarter.

North Macedonia recorded the highest growth, at 4.3%, up from 3.1% in the first quarter. Kosovo ranked second at 4.1%, although its growth rate had slowed compared with the previous quarter.

Montenegro’s growth accelerated from 2.5% to 3.8%, while Bosnia and Herzegovina saw a slight improvement, from 2.3% to 2.4%.

With growth of 3.6%, Albania ranked second to last and was one of only two economies in the region, along with Kosovo, that did not record faster growth than in the first quarter.

Public finances: Albania bucks the regional deterioration

While most Western Balkan countries are facing deteriorating fiscal balances, Albania has recorded a more positive performance.

According to the European Commission, budget revenues generally grew strongly across the region in the first eight months of 2026, but spending increased even faster, with Albania the exception.

Higher spending was driven mainly by increased public investment in Montenegro, North Macedonia and Serbia.

As a result, North Macedonia and Montenegro recorded larger fiscal deficits than in the same period a year earlier, while Serbia moved from a balanced budget to a moderate deficit.

By contrast, Albania recorded a larger budget surplus, while Kosovo continued to post a surplus, though a smaller one than a year earlier.

Public debt also fell in most regional economies in June 2026 compared with the end of 2025.

The largest decline in the public debt-to-GDP ratio was recorded in Montenegro, at 4.2 percentage points, followed by Albania, at 3.9 percentage points.

At the end of June, Albania’s public debt stood at 49% of GDP, while Montenegro’s reached 58.5%.

Inflation accelerates across the region, with prices rising fastest in Kosovo

Average annual inflation in the Western Balkans accelerated to 4% in the second quarter of 2026, up from 3.2% in the previous three months.

Inflationary pressures continued into the third quarter, with consumer price increases ranging from 2.5% in North Macedonia to 7.2% in Kosovo.

According to the European Commission, inflation was driven mainly by higher food, transport and energy prices.

Despite mounting price pressures, the central banks of countries in the region with monetary autonomy kept their key interest rates unchanged during the third quarter of 2026./Monitor