Andorra's economy has continued to outperform expectations, with growth reaching 3.9% in 2025, driven by financial services, real estate, and construction. However, growth is expected to moderate to 2.1% in 2026 due to the ongoing war in the Middle East, which will also put upward pressure on inflation, projected at around 3% in 2026. Inflation is expected to gradually converge to the euro area target of 2% by the end of 2027.
The country has maintained prudent fiscal management, resulting in sustained surpluses and a declining public debt ratio. The current account surplus remains very large, estimated at 15.9% of GDP in 2025.
Key risks and challenges:
- Near-term risks: The war in the Middle East poses a risk to growth and could lead to higher inflation due to reduced demand and higher import prices.
- Medium-to-long-term challenges: Low productivity, lack of affordable housing, capacity limitations, and the impact of climate change on winter tourism are expected to weigh on growth. Population aging will also increase public expenditures on pensions and healthcare, straining public finances.
Policy priorities:
- Fiscal policy: Maintain a prudent fiscal stance, with a looser stance in 2026 appropriate given slowing growth. However, be prepared to tighten fiscal policy if inflation remains elevated. Use available fiscal space for growth-enhancing public investment in affordable housing, workforce upskilling, and transport connectivity.
- Financial sector policies: The banking sector remains strong, but its large size relative to the economy presents a systemic risk. Continue close supervision and maintain adequate buffers. The upcoming Financial Sector Assessment Program (FSAP) will provide a valuable opportunity to identify remaining vulnerabilities.
- Structural policies: Advance structural reforms to lift potential growth and enhance productivity. Deepen integration with neighboring regions and the EU, particularly through the EU Association Agreement (EUAA), to support economic diversification and improve market access. Implement reforms to address affordable housing shortages and improve labor market flexibility.
- Statistical capacity and data quality: Continue efforts to improve data quality and coverage to strengthen policy analysis and decision-making. Utilize high-frequency indicators alongside national accounts data to improve near-term growth projections.
Authorities' views: The authorities broadly agree with the staff's assessment and are committed to prudent fiscal management, structural reforms, and improving data quality. They emphasize the importance of ratifying the EUAA and implementing pension and healthcare reforms.
