TOPIC OF THE WEEK: Armenia revises GDP data, invites rethink of growth drivers
Armenia is the first country in the CCA region that has reported a full set of detailed GDP data for the second quarter of the year. 2Q23 GDP grew by a robust 9.1 percent YoY, down from the 12.1 percent YoY print in 1Q23 and weaker than the 10.9 percent YoY number implied by the monthly economic indicator. As a result, 1H23 GDP growth has still come in at double digits at 10.6 percent YoY.
Much more important from an analytical perspective is the significant revision that the statistical office has engineered to the 2022 and 1Q23 GDP data that forces us to re-analyze, re-think and re-interpret the underlying sources of economic growth in the country. So far our argument has been that Armenia has exhibited an atypical structure of growth drivers for an emerging market economy. Usually, EM economies tend to see negative contribution from net exports (of goods and services) during episodes of fast growth as brisk domestic demand spills into higher imports. Vice versa, recessions are accompanied by positive contribution by net exports as domestic demand is crimped. Up until now growth in Armenia was well characterized by exactly the opposite dynamics, whereas the stellar double-digit growth was predominantly driven by net exports. In turn, net exports (of goods and services) were positively affected by excess monetary transfers from Russia and recovering tourism, which in combination led to a vastly improved CA position.
The data has now been revised in a way that preserves, and actually strengthens, this explanation for 2022, but at the same time completely eliminates the powerful impulse derived from net exports so far in 2023. In fact, the latter were accounting for half of the 12.1 percent 1Q23 GDP growth before the revision vs virtually zero in the revised data and are also now subtracting almost 6 percent off 2Q23 GDP growth. As a result, growth drivers this year need to be re-assessed in the direction of domestic demand only, which signifies a return to the more standard EM structure of growth dynamics, where net exports take away from economic performance during the upcycle.
We acknowledge that this rotation of drivers can be better aligned with other indicators, including remittances and trade. The former have now returned to pre-2022 levels while the latter has been worsening given strong domestic demand. However, while we remain bullish on the Armenian economy, we need to slightly adjust downwards our growth trajectory for 2023 given the revised data. We now foresee a still brisk and above-consensus 8.0 GDP growth, albeit slightly down from our previous 9.0 forecast, and further deceleration to 5.0 percent in 2024.
We also investigate whether the decision to ban from Sep 26th the transit and re-export of European cars via Armenia (and Georgia) to Russia will affect growth dynamics. In our view, this will have a negligent impact on overall economic performance, with a larger effect on the redistribution of trade flows whereas the emerging trade surplus with Russia may suffer at the expense of improving trade position with the rest of the world.
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