Andorra: Economic Outline

Economic Indicators

Andorra's economy is dependent on foreign trade and relies primarily on tourism, commerce, and financial services. Growth has picked up slowly in recent years but remains sensitive to external impacts: as such, it was severely hit by the COVID-19 pandemic but rebounded ever since. In 2023, the Andorran economy displayed resilience, surpassing its long-term potential growth rate despite facing external challenges. According to the IMF, the economy expanded by an estimated 2.3% last year, primarily propelled by the service sector and a notable influx of tourists. Looking ahead, GDP growth is anticipated to decelerate to around 1.5%, aligning more closely with its lower long-term potential. Projections indicate real GDP growth at 1.8% for 2024 and sustaining at 1.5% from 2025 onward, mirroring the average growth rate in the euro area.

Andorra's public finances are generally sound, and low levels of general government debt provided the authorities with ample space to respond to recent external shocks. Despite persistent inflation and a positive output gap, the government maintained primary fiscal surpluses while moderately increasing public investment, particularly in social housing, throughout 2023. The primary balance surplus was estimated at 0.9% of GDP, with an overall surplus of 0.4% of GDP. In 2022, Andorra finalized its debt management strategy by issuing EUR 1.2 billion in Eurobonds. This move enabled the government to extend the maturity of its debt under favorable rates and broaden its financing sources. The government is projected to sustain primary balance surpluses of approximately 1% of GDP in the medium term. This trajectory is anticipated to lead to a reduction in debt to around 30% of GDP by 2027. On average, Andorra's significant current account surplus is nearly equally supported by net exports and net primary income. Tourism exports serve as the primary driver, leading to a larger trade surplus in services compared to the trade deficit in goods. This dynamic culminates in a positive overall trade balance for Andorra. Although private banking typically yields lower returns, In 2022, inflation surged to 6.2%, driven by significant increases in energy and food prices within the region, along with minor contributions from supply limitations and a slightly positive output gap. In 2023, headline inflation moderated to 5.6%, influenced notably by global fuel prices. The IMF expects inflation to decline further, to 4.3% this year and 2.4% in 2025. Andorra's economy is based on its services sector (78.1% of GDP), notably tourism, real estate, and finance (World Bank, latest data available). The banking sector is relatively large when compared to the country’s size, with the total banking assets representing around 6 times the nominal GDP, which may pose risks to the economy and the government's balance sheet, although these risks are mitigated by the high liquidity of the system and newly-created FX reserves. Andorran banks saw profitability climb to an annualized ROA of 0.8% in 2023Q3, compared to 0.6% in 2022 and 0.5% in 2021. This increase in profitability was propelled by higher interest margins, surpassing those of European counterparts (IMF).

A steady rise in workforce demand drove domestic labor participation and employment levels above those seen before the pandemic. A substantial increase in residents, nearly 8% over two years, largely due to immigration, helped meet this heightened labor demand. However, this only partially addressed the growing demand, as job vacancies increased across sectors, particularly in hospitality. Although Andorra historically maintained low unemployment rates, around 2%, recent labor market tightness has been exacerbated by shortages, notably in neighboring countries' service sectors. By 2023Q3, unemployment dropped to 1.2%, with only 266 individuals unemployed—among the lowest rates in Europe and consistent with Andorra's historical levels. Government-mandated increases, totaling close to 15% in the minimum wage during 2022–23, aimed to offset workers' loss of purchasing power while also ensuring competitiveness in the Andorran labor market. Andorra's income per capita is higher than the European average, and the country has one of the highest life expectancy rates in the world. As a result, the urban environment in the Principality is safe, the healthcare system is well-developed, and the education system is trilingual (Catalan, French, and Spanish).

Monetary Indicators	2015	2016	2017	2018	2019
Euro (EUR) - Average Annual Exchange Rate For 1 GBP	1.43	1.27	1.15	1.13	1.11

Source: World Bank - Latest available data.

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Latest Update: April 2024