ArmInfo. The expansion of external demand has supported the economy, consumer demand is recovering. The Central Bank of Armenia raised its key rate amid accelerating inflation.
In Q2 2021, economic activity grew to 8.0% y / y in June and 5.0% y / y in the first six months (4.3% y / y in Jan-May 2021). The acceleration of the indicator dynamics is due to both the low comparison base of the same period of the previous year, and the growth of business activity against the background of expanding external demand and under the influence of stimulating monetary and fiscal policies in the first half of the year. This is stated in the EDB's August Macro Review.
It is noted that in April-June, the recovery accelerated due to strong dynamics in all sectors of the economy. According to the Bank's analysts, economic growth in 2021 will amount to 4.2%. Expanding international and domestic demand continues to support industrial production. Industrial growth - by 1.3% y / y in June this year (2.1% y / y in Jan-June) is primarily due to an increase in electricity production, mining industries and the recovery of manufacturing output. The 0.2% y / y increase in processing in June was driven by food, alcoholic beverages, and construction materials.
The mining industry (up 2.0% y / y in June) was supported by the export of metal ores amid strong external demand and high copper prices, as well as demand for building materials. The positive dynamics will be stable throughout the year against the backdrop of stable external demand and recovery in domestic consumption.
The volume of construction work increased by 1.3% y / y in June (in Jan-June - by 10.8% y / y) due to an increase in funding from the state. Meanwhile, the dynamics of construction, financed by foreign investments, remains negative since the beginning of the year, which indicates the perception of country risk by private investors as high.
In June, the turnover of retail trade (by 3.2% y / y) and the organization of accommodation and catering increased (2.4-fold). Strong dynamics is largely due to the low comparison base of the previous year, the implementation of deferred demand, as well as an increase in the inflow of remittances.
Slower growth in household lending (to 4.4% y / y compared to 23.3% y / y in June of the previous year) amid weak demand for borrowed funds from the population, as well as slow growth rates in real wages restrain consumer demand in the second half of the year. Demand will be supported by the inflow of remittances from abroad against the background of the recovery of labor migration and business activity in the world, as well as the use of savings by households.
Consumer prices in Armenia increased by 8.2% y / y in July after 6.5% in June. The acceleration in inflation is due to the rise in prices for imported food and non-food products compared to the same period of the previous year. An additional factor is the faster recovery in consumer demand compared to production capacity (Central Bank of Armenia, 2021a).
The EDB expects that the y / y rate of price growth will stabilize near the current levels in Q3. A slowdown is expected by the end of the year, under the influence of a tightened monetary policy, and subject to stable stabilization of the national currency and world prices for goods and raw materials.
The Central Bank of the Republic of Armenia increased the refinancing rate by 0.5 percentage points to 7.0% in August 2021 amid continued strong growth in prices and consumer demand. The regulator announced the likelihood of further tightening of monetary conditions in the near future due to increased risks of accelerating inflationary expectations (Central Bank of Armenia, 2021b). In this scenario, monetary policy could have a dampening effect on demand earlier than expected in the baseline scenario of the EDB's forecast.
The deficit of foreign trade in goods continues to decline compared to the same period last year - to $ 812 million in Jan-June 2021 ($ 912 million a year earlier). The value of imports is growing more slowly amid a strong expansion of exports (7.9% and 23.3% y / y, respectively).
Strong exports were secured by an increase in supplies abroad of mineral products (by 38.8% y / y in Jan- June), textile products (by 59.8% y / y) and base metals (by 36.7% y / y). Exports were supported by an increase in international prices for metals, an increase in the economic activity of Armenia's trading partners, as well as a devaluation of the dram exchange rate during H1 2021.
The state budget of the Republic of Armenia was executed with a deficit of 2.4% of GDP in Jan-June 2021 (a deficit of 1.9% a year earlier). Budget expenditures increased by 13.2% y / y in Jan-June. Operating costs increased by 9.6% y / y, while capital - by 68%, due to the implementation of unfinished programs planned from last year. According to the preliminary version of the program of medium-term expenditures for 2022- 2024, the state budget deficit is projected at the level of 4.6% of GDP for the current year against the previously planned 5.3% of GDP due to a decrease in planned expenditures by 0.8 percentage points. GDP. Under these conditions, the impact of fiscal policy on demand is assessed as constricting at the end of the current year.
As of June of this year, the government's debt reached 67.1% of GDP, and the total public debt - 70.9% of GDP (an increase of 3.7 percentage points since the beginning of the year). According to the draft document of the RA Ministry of Finance on reducing the level of government debt, the indicator will decrease to 60% already in 2022 and, while maintaining a stable trajectory, will decrease to 53.8% by the end of 2026. The main way of implementing the program will be fiscal consolidation: next year, expenditures budget will be reduced by 1.6 percentage points. GDP at the expense of current expenditures, and tax revenues will increase by 0.5 percentage points.
Meanwhile, the government is going to improve the structure of expenditures in favor of capital investments, increasing them by 1 percentage point up to 4% of GDP by 2024 in order to support economic growth in the long term.