Wednesday, June 7 2023 19:05

ArmInfo. The World Bank has improved its forecast for GDP growth in Armenia for 2023 from the  previous 4.1% to the updated 4.4% (against the actual 12.6% growth in 2022), expecting an acceleration in 2024 to 4.8% and up to 5%. in 2025). This is noted in the WB's Flagship Report on Global Economic Prospects for June 2023.

Among Armenia's neighboring countries, the World Bank expects a  similar GDP growth in Georgia by 4.4% in 2023  (against 10.1% growth  in 2022), with an acceleration in 2024 to 5% and maintaining these  rates in 2025. The projected GDP growth in 2023 in Azerbaijan looks  much more modest -by 2.2% (against 4.6% growth in 2022), by 2.5% -in  2024, by 2.6% in 2025. In Turkey, according to the WB forecast, GDP  growth in 2023 will slow down to 3.2% (from 5.6% in 2022), after  which in 2024 there will be an acceleration to 4.3%, but then in 2025  it will again slow down to 4.1%. In Iran, a y-o-y slowdown in GDP  growth is projected to 2.2% in 2023 (from 2.9% in 2022), to 2% in  2024 and to 1.9% in 2025.  The Russian economy will linger in  recession, and Ukraine's GDP will grow.

Among the EAEU countries, the economic decline in Russia will  continue with a slowdown to 0.2% (from 2.1% in 2022), after which  there will be an increase of 1.2% in 2024, but then in 2025 the pace  will slow down to 0.8%. In Belarus, according to the WB forecast, the  economy will reach 0.6% growth in 2023 (from a 4.7% decline in 2022),  then, similarly to the Russian economy, modestly accelerating in 2024  to 1.4% and then slowing down to 1.3% in 2025. In Kazakhstan, GDP  growth will accelerate in 2023 to 3.5% (from 3.3% in 2022), then to  4% in 2024, but in 2025 there will be a slowdown to 3.6%. In  Kyrgyzstan, GDP growth will slow down to 3.5% in 2023 (from 7% in  2022), but then in 2024 the pace will accelerate to 4% and remain at  this level in 2025.

It is noteworthy that the World Bank forecasts a much more pronounced  improvement in economic prospects in Ukraine, than in Belarus and  Russia, with GDP in 2023 reaching 2% growth from a 29.1% decline in  2022, and what will be the pace in 2024-2025 is not indicated in the  report.  In the Europe and Central Asia (ECA) region, which includes  Armenia, Georgia, Azerbaijan, Turkey, the Russian Federation, the CIS  countries, Ukraine and neighboring countries, the World Bank  forecasts an acceleration in economic growth in 2023 to 1.4% (from  1.2 % in 2022), followed by an acceleration in 2024 to 2.7% and  maintaining these rates in 2025. The worst prospects in 2023 are  expected for the Russian economy (0.2% decline), and the best for the  Tajik economy (6.5% growth).

According to the source, the World Bank's latest projections indicate  that the world economy will remain frail-and at risk of a deeper  downturn-this year and in 2024. Our baseline scenario calls for  global growth to slow from 3.1 percent in 2022 to 2.1 percent in  2023, before inching up to 2.4 percent in 2024. Even this tepid  growth assumes that stress in the banking sector of advanced  economies does not spill over to EMDEs. The lessons of economic  history are forbidding. Rapid interest-rate increases of the kind  that have been underway in the United States over the past year are  correlated with a higher likelihood of Foreword xvi financial crises  in EMDEs. And if the current banking stress in advanced economies  metastasizes into widespread financial turmoil affecting EMDEs, the  worst- case scenario would have arrived: the global economy would  experience a deep downturn next year. This report offers a roadmap  for policymakers- not only for avoiding the worst outcomes but also  on how to put the global economy back on track. Five steps can make  the difference: 

ECA Economic Prospects continue to be held back by Russia's War in  Ukraine

According to the report, economic prospects in Europe and Central  Asia (ECA) continue to be held back by the Russian Federation's  invasion of Ukraine. Growth in ECA is projected to remain weak in  2023, edging up to a modest 1.4 percent, as the effects of the  invasion, high inflation, tight monetary policies, and subdued  external demand weigh on activity. Regional growth is forecast to  pick up to 2.7 percent in 2024, as inflation gradually recedes and  demand firms. Risks to the outlook are tilted to the downside and  include an intensification of Russia's invasion in Ukraine, rising  geopolitical tensions elsewhere in the region, higher and more  sustained inflation, a sharper economic slowdown than expected in the  region's main trading partners, and further financial sector turmoil.

Output in Ukraine fell by about 29 percent last year, somewhat less  dramatically than expected earlier. The reopening of Ukraine's Black  Sea ports and the resumption of grain trade offset some of the impact  of Russia's invasion on activity. As of May 2023, more than 30  million tons of grain and other foodstuffs had been exported via the  Black Sea Grain Initiative, which has been extended until mid-July.   External official financing also helped to mitigate some of the  invasion's impact. By the end of 2022, the destruction of critical  energy infrastructure had affected about 40 percent of the power  grid, and it continues to weigh on activity. However, there are  indications that firms and households have somewhat adapted to the  outages.

In Russia, ECA's largest economy, output contracted 2.1 percent in  2022, amid international sanctions imposed in response to Russia's  invasion of Ukraine. The recession was less severe than projected  earlier, due to higher oil production, the redirection of oil exports  away from traditional markets, and more government fiscal support  than initially assumed. Clear signs of trade diversion emerged  following the invasion, with the value of Russian fuel exports to the  EU declining by over 40 percent last year, while exports to India and  China increased. Russian imports from Trkiye more than doubled.  Those trends were also reinforced since the beginning of the year,  with Russia's fuel exports to the EU falling by 87 percent in March  from a year earlier (Darvas, Martins, and McCaffrey 2023; World Bank  2023d). 

Regional trade patterns have changed

Broader regional trade patterns changed as a result of the invasion,  with more Western countries exporting to Central Asia and the  Caucasus. Simultaneously, there was a rise in exports from those  countries to Russia. However, this apparent "intermediated trade" is  only a fraction of what was previously exported directly to Russia  (Chupilkin, Javorcik, and Plekhanov 2023; Darvis, Matins, and  McCaffrey 2023). An extension of the voluntary oil production cut of  500,000 bpd until the end of this year was announced in April, as  part of an agreement by the members of OPEC+. Russian activity  contracted by 1.9 percent year on year in the first quarter of 2023.

Trkiye was hit by two major earthquakes in early February, with  direct losses estimated at 4 percent of 2021 GDP. However, the full  costs of recovery and reconstruction could be twice as high. The  evolution of macroeconomic policies is uncertain against the backdrop  of high inflation, which has been met with further interest rate cuts  by the central bank, alongside the general elections that took place  last May. Exchange rate depreciation, as well as a high current  account deficit and low net forex reserves also present significant  challenges. Despite these headwinds, the country remains a key  contributor to ECA growth, and the economy remained resilient in the  first quarter of 2023.

Inflation remains high in ECA, especially in Trkiye

While nominal wage increases have generally lagged inflation, real  wages dropped by as much as 3.3 percent in Eastern Europe in the  first half of 2022, with Central Asia and South Caucasus the  exceptions (ILO 2023). In those two subregions, diversion flows from  Russia boosted domestic demand, which contributed to higher  inflation. Recent signs of deceleration in 12- month inflation rates  in some ECA countries, can be attributed to base effects and because  of the decline in energy prices from last year's record highs. Core  inflation remains elevated. To rein in the above-target inflation, 17  central banks in the region raised policy rates in 2022, and 6 have  raised them further so far in 2023

Outlook remains particularly uncertain due to Russia's invasion of  Ukraine

Growth in ECA is projected to edge up slightly in 2023, to 1.4  percent; however the outlook remains particularly uncertain due to  Russia's invasion of Ukraine and its repercussions. The baseline  assumes that the invasion continues throughout the forecast period  but with no escalation in its intensity. Excluding Russia and  Ukraine, growth in ECA is projected to nearly halve in 2023, to 2.4  percent. The 1.3 percentage points forecast upgrade since January for  the region is mainly because of an upward revision for Russia (figure  2.2.2.A). Regional growth is projected to rebound to 2.7 percent a  year in 2024-2025, driven by stronger external and domestic demand,  in a context of fading adverse growth shocks. Divergences in growth  rates within the region should fade as migrant and capital flows from  Russia ease, and growth improves in the EU. After declining in 2023,  the projected increase in oil prices in 2024- 2025 should benefit oil  exporters.

Potential growth in ECA is expected to depend increasingly on capital  accumulation

The dual shocks of the COVID-19 pandemic and Russia's invasion had a  significant impact on regional growth, which is expected to remain  below its potential rate during the forecast horizon. This dampening  is attributed to tighter financial conditions and gradual fiscal  consolidation in many countries. Potential growth in the region is  projected to slow to an annual average pace of 3 percent in 2022-30,  down from 3.6 percent in 2011-21.  Potential growth is expected to  depend increasingly on capital accumulation as the growth rates of  both the labor force, including of women, and total factor  productivity are set to weaken (figure 2.2.2.B; Kilic Celik, Kose and  Ohnsorge 2023).

Output in Russia is projected to contract slightly, by 0.2 percent in  2023, a 3.1 percentage point upgrade from the January 2023 forecast.1  This change mainly reflects the unexpected resilience of oil  production and higher-than-expected growth momentum from 2022.  Continued contraction in export volumes, weak domestic demand, policy  uncertainty, and sanctions due to Russia's invasion of Ukraine will  continue to weigh on activity. In 2024, growth is expected to turn  positive, but remain modest at only 1.2 percent, which is lower than  the average pace of growth in the 2010s. The economy is expected to  confront persistent structural problems, including unfavorable  demographic trends, and a low investment rate and productivity.

In Ukraine, Russia's invasion continues to take a heavy human and  economic toll. The outlook is marked by pronounced uncertainty.  Output is anticipated to expand by 2 percent in 2023. This represents  a downgrade of 1.3 percentage points since January, mostly to take  account of the economic disruptions caused by the destruction of  energy infrastructure in the fourth quarter of 2022. Public finances  will remain under pressure despite official external support,  including the recently agreed IMF financing of $15.6 billion under  the Extended Fund Facility (IMF 2023a). Reconstruction and recovery  costs have been estimated at 2.6 times the 2022 level of GDP and more  than 8 million refugees have been recorded across Europe (figure  2.2.2.C; World Bank 2023f). Growth in Trkiye is anticipated to slow  to 3.2 percent in 2023 before rebounding to 4.3 percent in 2024,  assuming normalization in macroeconomic policies with a tightening of  the policy mix, with domestic demand remaining the key driver.2  Despite the damage caused by the earthquakes in early 2023,  forecasted growth in both years is slightly higher than previously  projected, partly owing to positive momentum from strong growth in  late 2022 and additional government support to households.  Reconstruction efforts are expected to support investment. In Central  Europe, growth is anticipated to experience a significant further  decline to 1.1 percent this year, as a result of the slowdown in the  euro area and the tightening of domestic monetary policies. Growth is  expected to gather pace in 2024- 25, partly owing to increased use of  funding from the EU Recovery and Resilience Facility (RRF), including  by Bulgaria and Croatia, a new member of the euro area since January  2023 (figure 2.2.2.D; Pfeiffer, Varga, and in't Veld 2021). In the  Western Balkans, growth is forecast to decelerate to 2.6 percent in  2023, reflecting spillovers from Russia's invasion of Ukraine, lower  private consumption, tight global financial conditions, and weaker  growth of demand from the euro area. Fiscal consolidation should be  limited, with higher fiscal spending expected in several economies.  Growth should pick up moderately in 2024-2025, driven partly by  strengthening growth in the EU (World Bank 2023g).

In the South Caucasus, growth in 2023 is projected to slow to 3  percent, as growth weakens in the EU and migrant and capital flows  from Russia ease. Private sector growth remains constrained by poor  connectivity and infrastructure, skills mismatch, and weaknesses in  the business environment. Growth in the subregion is projected to  pick up somewhat, to an annual average of 3.5 percent, in 2024-25.  Growth in Central Asia is anticipated to remain flat at 4 percent in  2023. Slower growth in the Kyrgyz Republic, Tajikistan, and  Uzbekistan, due to lower remittances from Russia, is offset by  robust, energy sector-driven growth in Kazakhstan. Growth is expected  to increase modestly in 2024-25, as investment growth strengthens  thanks to FDI in mining, and inflation returns to prepandemic rates  in tandem with global inflation, mainly reflecting lower energy  prices. Energy access remains an important challenge for countries  like the Kyrgyz Republic and Tajikistan. Structural reforms to  increase international competitiveness and boost the private sector  are likely to increase potential growth in the longer term. In  Uzbekistan, the government aims to partially privatize state-owned  enterprises (SOEs) and state-owned banks, while in Kazakhstan, a new  independent competition agency and a privatization plan for 2021-2025  should help to reduce the role of SOEs.

Risks to the regional outlook remain tilted to the downside

These include the possibility of a more intense or prolonged Russia's  invasion of Ukraine, a protracted period of tighter monetary policies  amid elevated inflation, and weaker-than-expected external demand.  Downside risks also include financial sector stress, the possibility  of an escalation in geopolitical tensions in other parts of the  region, and greater dislocations from possible adverse weather events  associated with climate change. An escalation of the invasion of  Ukraine could increase the risk of energy insecurity, as the region  continues to be vulnerable to supply disruptions and its dependency  on Russia. A steeper-than-expected slowdown in the euro area could  further dampen external demand.  Countries in Central Europe and the  Western Balkans would be hardest hit since the euro area accounts for  a relatively high proportion of their exports-about 52 percent on  average for 2010-19 (World Bank 2023h). The costs of sending  remittances from Russia have been raised significantly by  international sanctions in response to the invasion (IMF 2023b). Such  remittances could grow more slowly than projected this year,  especially in Central Asia and South Caucasus, where remittances from  Russia accounted for 57 percent in 2021 and were equivalent on  average to 12 percent of the GDP of the two subregions during 2010-19  (figure 2.2.3.A; World Bank 2022a).

More sustained inflation than expected would erode real disposable  incomes and consumer confidence

A resurgence in food or energy prices would heighten concerns for the  food or energy security of vulnerable households, particularly in  countries where fiscal space is lacking (World Bank 2023d). Inflation  could be more persistent as tensions have been observed in some real  estate markets, with rental prices increasing due to a higher demand,  also associated with migrant inflows in the Eastern part of the ECA  region. Inflation may not decline to the target levels of some  central banks over the next year.  Central banks could hike policy  rates by more than currently expected if inflation remains  persistently high; however the potency of monetary policy  transmission to bank lending remains weak in some countries,  especially in the East of the region. Further monetary policy  tightening would increase borrowing costs and lead to a more  pronounced slowdown. Financial stress among sovereigns, banks, and  non-bank financial institutions may result not only from additional  monetary tightening but also from concerns associated with a possible  weaker growth in an environment of elevated debt. Moreover, further  stress in the banking sectors of advanced economies could spill over  to the region and lead to exchange rate pressures, increasing foreign  exchange credit and liquidity risks, especially in the Caucasus and  Central Asia, characterized by high levels of dollarization (figure  2.2.3.C; Khandelwal et al. 2022).

Political uncertainty remains significant in the region

There are questions in several countries about prospects for progress  with structural reforms that are assumed in the baseline (Bosnia and  Herzegovina, Montenegro, North Macedonia). There is still no  agreement to form a coaliFIGURE 2.2.3 ECA: Risks Risks to the  regional outlook remain tilted to the downside, including lower  remittances and more persistent inflation than projected in the  baseline. Financial sector stress could affect already-fragile  banking systems. Climate-change-related extreme weather events could  also increase in frequency or severity and exacerbate the  already-high welfare costs of pollution. A. Remittances inflows B.  Inflation expectations and targets C. Dollarization in South Caucasus  D. Welfare costs of pollution and Central Asia Sources: Consensus  Economics; IMF financial soundness indicators; national sources; OECD  Stats; World Bank. Note: e = estimate; f = forecast; PM2.5 = fine  particulate matter of size 2.5 micrometers. CA = Central Asia; CE =  Central Europe and Baltic Countries; ECA = Europe and Central Asia;  EE = Eastern Europe; RUS = Russian Federation; SCC = South Caucasus;  TUR = Trkiye; WBK = Western Balkans. A. Blue bars represent  estimates and projections of remittance volume, represented in  billions of U.S. dollars, in the ECA region. The yellow diamond  represents estimates and projections of the growth rate of remittance  flows. B. Figure shows the median Consensus Economics forecast of  headline CPI inflation for 2023-24 based on the May 2023 surveys of  16 ECA economies. 

Inflation targets as of May 2023. C. Blue columns show the average  foreign currency- denominated liabilities to total liabilities ratio  for the countries of the subregion. Red columns show the foreign  currency-denominated loans to total loans ratio for the countries of  the subregion. Annual data as of 2022 when available (2021 or 2020  data used otherwise). D. Blue columns represent the welfare costs of  premature mortalities to ambient PM2.5 pollution, in percent of GDP.  Red line represents the OECD Europe average. This indicator uses  estimates of premature mortality and morbidity attributable to  ambient PM2.5 air pollution to value the economic cost in dollar  terms. Data as of 2020. 0 10 20 30 40 50 0 5 10 15 20 25 Ukraine  Hungary Moldova Poland Kazakhstan Belarus Uzbekistan Romania Serbia  Azerbaijan Montenegro Kosovo Georgia Russian Fed. Albania Armenia  Trkiye (RHS) Target Inflation expectation for 2023 Inflation  expectation for 2024 Percent Percent 0 10 20 30 40 50 60 SCC CA FX  liabilities to total liabilities FX loans to total loans Percent 0 2  4 6 8 10 12 WBK SCC CE EE CA RUS TUR Welfare costs of premature  mortalities from exposure to ambient PM2.5 OECD Europe average  Percent of GDP -10 -5 0 5 10 15 20 -40 -20 0 20 40 60 80 2019 2020  2021 2022e 2023f Volume Growth rate (RHS) US$, billions Percent 64 C  H A PTER 2.2 GLOB AL EC ON OMIC PR OSPEC TS | JU N E 2023 tion  government in Bulgaria, following April's parliamentary election (the  5th in two years). In Georgia, authorities dropped a controversial  foreign agent law after mass protests. In Trkiye, macroeconomic  policies may change following the elections last month. Border  tensions threaten a resumption of further escalation of tensions  between Armenia and Azerbaijan, while tensions between Kosovo and  Serbia have reduced in the context of the recent advances in the  dialogue on the implementation of an EU-sponsored plan to normalize  relations.  Finally, natural disasters, illustrated recently by the  earthquakes in Trkiye but also by several extreme weather events,  could disrupt economic activity. Without further action to mitigate  or adapt to climate change, economic damage from droughts and floods  in Central Asia is projected to amount to the equivalent of 1.3  percent of GDP per year (World Bank 2022b). About 96 percent of the  ECA population is exposed to levels of pollution exceeding World  Health Organization guideline values. The welfare costs of premature  deaths due to PM2.5 pollution have been estimated at the equivalent  of between 5 to 11 percent of GDP in the subregions, well above the  European average of 3 percent (figure 2.2.3.D; OECD 2022).

It should be noted that the current forecast of the World Bank was  preceded by improved forecasts of the IMF, EBRD and the Central Bank  of Armenia in March-May. Thus, in April, the IMF improved its  forecast for Armenia's GDP growth for 2023 from the previous 4.5% to  an updated 5.5%. In May, the EBRD improved its 2023 GDP growth  forecast for Armenia from the previous 4% to an updated 5%. And the  Central Bank of Armenia, in its May forecast report, improved its GDP  growth forecast earlier in March from the previous 4.9% to an updated  5.8%. As you can see, the 4.4% GDP growth forecast by the World Bank  in Armenia in 2023, even in the improved version, looks more modest  than the forecasts of the IMF, EBRD and the Central Bank of Armenia.