Improving Armenia`s economic growth forecast for 2023, WB expects it  to worsen from 2024

ArmInfo.The World Bank has improved its 2023 GDP growth forecast for Armenia from the previous 4.4% to an updated 7.1% (against the actual 12.6% growth in 2022), now expecting a slowdown to 4.7% in 2024 and to 4.5% in 2025 (versus previously forecasted y-o-y acceleration to 4.8% and 5%). This is noted in the January Global Economic Prospects report published by the World Bank.

Among Armenia's neighboring countries, the forecast of Georgia's GDP  growth in 2023 has also improved - from the previous 4.4% to an  updated 6.5% (versus 10.1% growth in 2022), slowing to 4.8% in 2024,  after which an acceleration to 5% is expected in 2025 (against the  previous 4.5% for 2024-2025). The projected GDP growth of Azerbaijan  for 2023 has worsened from the previous 2.2% to 1.5% (against 4.6%  growth in 2022), to 2.4% for 2024 and to 2.5% for 2025 (against  previous 2.5% and 2.6%).  According to the World Bank forecast,  Turkey's GDP growth will slow to 4.2% in 2023 (from 5.6% in 2022),  with a continued slowdown to 3.1% in 2024, and then it will   accelerate slightly to 3.9 % in 2025. For Iran, the World Bank  upgraded its forecast not only for 2023 from the previous 2.2% to an  updated 4.2% (from 2.9% in 2022), but also for 2024 and 2025 to 3.7%  and 3.2% respectively (against the previous 2% and 1.9%).

Russia will face economic stagnation in a year, and Ukraine will  become the leader in GDP growth in the ECA

Among the EAEU countries, the forecast for the Russian economy has  been improved: - from the previous decline of 0.2% to renewed growth  of 2.6% for 2023 (versus a 2.1% decline in 2022), with a slowdown to  1.3% in 2024 and to stagnant 0.9% in 2025 (versus the previous  similar 1.2% and 0.8%).

According to the World Bank forecast, the Belarusian economy will  grow by 3% in 2023 (from a decline of 4.7% in 2022) instead of the  previously expected 0.6%, but the pace will slow down to a stagnant  0.8% already in 2024 and will remain at this level in 2025 (versus  the previous 1.4% and 1.3%).

GDP growth in Kazakhstan will accelerate to 4.5% in 2023 (from 3.3%  in 2022) instead of the previously expected 3.5%, then the pace will  slow down to 4.3% in 2024, but it will return to 4.5% in 2025   (versus the previous 4% and 3.6%).  Kyrgyzstan's GDP growth forecast  is left at the same level, slowing to 3.5% in 2023 (from 7% in 2022),  accelerating to 4% in 2024 and maintaining this level in 2025.

It is noteworthy that the World Bank forecasts a much more pronounced  improvement in economic prospects for Ukraine than for Belarus and  Russia, with GDP reaching 4.8% growth in 2023 (from a 29.1% decline  in 2022) instead of the previously expected 2%, with a slowdown to  3.2% in 2024, but an acceleration to 6.5% will follow in 2025.

For the Europe and Central Asia (ECA) region, which includes Armenia,  Georgia, Azerbaijan, Turkey, the Russian Federation, CIS countries,  Ukraine and neighboring countries, the World Bank forecasts an  acceleration of economic growth to 2.7% in 2023  (from 1.2 % in 2022)  instead of the previously expected 1.4%, followed by a slowdown in  the pace to 2.4% in 2024, but already in 2025 an  acceleration to  2.7% is expected (against the previous 2.7% for 2024 and 2025).

The best prospects for economic growth are as follows: For 2023,  Tajikistan and Armenia have the best prospects with growth of 7.5%  and 7.1% respectively, for 2024 Tajikistan and Uzbekistan have the  best prospects with growth of 5.5% each , and in 2025 the highest  economic growth in the region will be in Ukraine - 6.5%. 

The lowest growth forecasts in the region are as follows: For 2023,  the lowest growth will be in Poland - (0.5%), For  2024 - in  Belarus(0.8%), the economy of which, together with the Russian one,  will be close to stagnation at the level of 0.8-0.9 % in 2025. The  World Bank does not expect an economic downturn in the countries of  the ECA region this time.

The World Bank's global economic growth forecast for 2023 has been  improved from the previous 2.1% to an updated 2.6% (versus 3.1% in  2022), after which the pace will slow to 2.4% in 2024, but there will  be an acceleration to 2.7% already in 2025  (against the previous  2.4-3% for 2024-2025). 

At the same time, the US economic growth forecast for 2023 has been  improved to accelerate by 2.5% (from 2.1% in 2022) instead of the  previously expected slowdown to 1%, but then the pace will slow down  to 1.6% in 2024 and slightly accelerate to 1.7% in 2025 (versus  previous 0.8% and 2.3%). In the Eurozone, economic growth will slow  down to a stagnant 0.4% in 2023  (from 3.5% in 2022), after which  there will be a slight acceleration to 0.7% and 1.6% in 2024-2025  (against the previous 1.3 -2.3%). For the Japanese economy, the World  Bank now expects growth to accelerate to 1.8% in 2023  (from 1% in  2022), with a further slowdown to 0.9% in 2024 and to 0.8% in 2025,  against the previously expected y-o-y slowdown to 0.8%-0.7%  in 2023  -2025 and 0.6%. For the Chinese economy, the World Bank predicts an  acceleration of growth in 2023 to 5.2% (from 3% in 2022) instead of  the previously expected 5.6%, but then there will be a slowdown in  the pace to 4.5% in 2024  and to 4.3% in 2025 (against the previous  4.6% and 4.4%).

WB  projects stable growth in the South Caucasus in 2024-2025

According to World Bank forecasts, private consumption is the main  driving force behind the growth of economic activity in the ECA  region, supported by weakening inflation pressures, and exports,  stimulated by a gradual recovery in the eurozone. . Growth slowdown  in the region in 2024 first of all reflected in the deterioration of  Turkey's outlook due to further tightening of monetary policy.   Uncertainty over the development of the Russian invasion of Ukraine  plays an important role in shaping regional prospects.  Excluding  these two economies, the World Bank expects growth in the ECA region  to accelerate to 3.1% in 2024 and further to 3.7% in 2025.

Most ECA countries are likely to continue easing monetary policy as  inflation is forecast to decline.  However, core inflation exceeds  official inflation, which continues to exceed target levels in most  countries. Fiscal consolidation is projected to pick up pace in half  of the region's countries in 2024.

For Russia, the World Bank expects that tightening monetary policy  will lead to a decline in domestic demand. Trade is diverted to  China, India and Turkey, which is visible for both exports and  imports.  However, for products sanctioned in response to the  invasion, increased imports from China will offset only about a  quarter of the decline in imports from the EU in 2022. Capacity  constraints, including difficult labor market conditions and domestic  labor shortages due to the invasion, will continue to constrain  growth.

Inflation in Turkey is forecast to become high in the first half of  2024, but then, according to the World Bank's expectations, it will  gradually begin to decline, mitigating the negative impact on private  consumption.

Ukraine's prospects, according to the World Bank's forecast, remain  highly uncertain. Active hostilities are expected to continue through  2024, with base effects and one-time factors, including crop yields,  expected to dissipate. Partial resolution of uncertainty in 2025 will  contribute to the resumption of exports and a gradual increase in  investment in reconstruction.

The World Bank forecast for the Central European region (including  Belarus, Moldova and Ukraine), predicts an acceleration of economic  growth from 0.7% in 2023 to 2.8% in 2024 and up to 3.5% in 2025,  reflecting strengthening external demand in the eurozone, improving  domestic demand amid a recovery in real wages and the absorption of  EU funds through the Recovery and Resilience Fund.

According to the World Bank's forecast, stable growth of 3.3% in the  South Caucasus will continue in 2024-2025, while the influx of  remittances from Russia is expected to continue to decline, and  re-exports and tourism will continue to support economic activity.  However, long-term growth will continue to be hampered by dependence  on raw materials, weak transport communications and logistics, as  well as the likelihood of escalation of relations between Armenia and  Azerbaijan.

The World Bank forecasts that regional growth in the ECA will remain  below pre-pandemic levels, reflecting the lingering effects of the  pandemic and Russia's invasion of Ukraine. The World Bank expects the  pace of per capita income convergence in the ECA to remain slow, with  average per capita income reaching 24% of EU levels in 2025. Average  per capita income will remain highest in Central Europe, reaching 41%  of EU levels in 2025.

The WB report notes that accelerated progress on gender equality can  lead to faster and more inclusive economic growth. While the ECA  region has a smaller gender gap on average than other EMDE regions,  Central Asia and Turkey continue to face gender inequality in the  world of work. Accelerated gender reforms can help build human  capital.

Baseline outlook risks  remain tilted to the downside

The ongoing conflict in the Middle East, especially if it prolongs or  spreads, could negatively impact the ECA region. Renewed increases in  energy prices, especially European natural gas, will make it more  difficult to reduce inflation, while potential benefits will be  limited to energy exporting economies such as Russia and Central  Asia. In addition, increased uncertainty could tighten financial  conditions, discouraging investment and consumption. Geopolitical  tensions continue to create downside risks. Between 2021 and 2023,  the number of political violence and demonstrations in the region  almost tripled, especially in Russia and Ukraine. Increasing tensions  and conflicts could worsen the already heavy human and economic  costs.  Other geopolitical tensions, such as tensions between Armenia  and Azerbaijan and between Kosovo and Serbia, may resume. The large  number of presidential, parliamentary and local elections in 2024  also increases uncertainty about future economic policy.

More persistent inflation than currently assumed could lead to  monetary policy tightening over a longer period of time and put  pressure on economic activity. Most countries are unlikely to reach  inflation targets by the end of 2024. A wage price spiral in the  Western Balkans, Central Europe and Turkey, or higher- than-forecast  commodity prices - potentially driven by escalating conflict in the  Middle East - could contribute to such inflation.

External vulnerabilities in the region are significant, with almost  three-quarters of ECA countries having external debt levels above the  EMDE average in 2022. If global financial conditions tighten, this  could trigger capital outflows and increase borrowing costs.  Financial stability risks may arise in Central Asia due to  underdeveloped banking systems and increased credit risk. The delayed  impact of sanctions in response to Russia's invasion of Ukraine could  lead to increased costs for international payment settlements in  Kyrgyzstan and Tajikistan.

Weaker-than-expected growth in the eurozone, the region's main  trading partner, will have a negative impact on the ECA through trade  channels. Central Europe, the South Caucasus and the Western Balkans  will be particularly affected, given that on average half of their  goods exports go to the eurozone. Tighter trade restrictions could  also lead to further fragmentation of trade. In addition, a larger  economic slowdown in China or a sharper-than-expected decline in  remittances from Russia would be an external headwind for Central  Asia and the South Caucasus.

Ambitious implementation of structural reforms aims to improve  economic growth prospects. The green transition will be supported by  reforms that improve the investment climate, stimulate financial  sector development and reduce the carbon footprint of financial  flows. The energy sector requires deep transformation to achieve its  2050 net-zero emissions target, potentially strengthening growth and  sustainability.

Back in December, the International Monetary Fund (IMF) upgraded its  2023 GDP growth forecast for Armenia from the previous 5.5% to an  updated 7%, while maintaining expectations for 2024, during which the  rate will decrease to 5% and continue at this level until 2025. Te  European Bank for Reconstruction and Development (EBRD), in its  September forecast, improved Armenia's GDP growth for 2023 from the  previous 5% to an updated 6.5%, expecting a slowdown in 2024 to 4.5%  (versus the previously announced retention at 5%). 

In its December forecast report, the Central Bank of Armenia once  again upgraded its GDP growth forecast for 2023, now from the  previous 7.2% to an updated 8.3%, while revising its expectations for  2024 to a higher growth of 6.1 %. (versus the previously announced  5.6%). The draft state budget of Armenia for 2024 envisages 7%  economic growth (similar to the rate envisaged in the 2023 budget),  and an increase in added value is planned to be achieved: 4.7% - in  industry, 3.5% - in agriculture, 8.9% - in construction, 7.9% - in  the service sector,  and tax collection will increase by 7.3%.