A Cloudy Outlook for Armenia

Key Messages

Economic growth is expected to slow further from modest 3.5 percent registered in 2013. This slowdown is the result of a number of factors including slackening foreign direct investment, dependence on a limited number of commodity exports, and a difficult external economic environment.

Consumer lending and remittances continued to support private consumption, but under-execution of government spending suppressed aggregate demand. On the supply side, the mining and energy sectors performed particularly badly, offsetting positive developments in manufacturing.

Year-on-year inflation remains at below the target of 4 percent in the second half of 2014, despite the electricity tariff increases in August of 2014. On the whole, second-round price pressures were minimal. Core inflation, excluding prices for food and fuel, stayed below headline inflation in the second half of the year.

The expectation of accession to the Eurasian Economic Union (EEU) has not yet had much impact on Armenia’s trade profile. In fact, exports to the EEU declined. Among the developing Commonwealth of Independent States (CIS), trading partner slowdowns, geopolitical tensions, declining metal and mineral prices, and domestic capacity constraints have been slowing growth this year.

The anticipated shift to the EEU will undermine Armenia’s medium-term export prospects because demand will grow more rapidly in the EU. Rising demand from advanced countries in Europe contributed to export growth of in the beginning of the year.

During the first half of 2014, political developments complicated the environment for economic growth. A new cabinet was formed when the prime minister resigned in April after a long period of sluggish economic reforms.

The incidence of poverty is recovering slowly from the 2009 economic crisis, in line with growth dynamics. The composition of the consumption basket for both poor and non-poor groups of Armenians to some extent offset poverty pressures related to price increases.

Employment is not a sufficient safeguard against poverty; the poverty rate among the employed grew from 22.2 in 2008 to 26.1 percent in 2012. Up to 2009, shared prosperity – or growth in average consumption of the bottom 40 percent – experienced high annual growth of 4.3 percent. A large contraction of 7.5 percent then occurred during the crisis, with a subsequent recovery to growth of 3.4 percent between 2010 and 2012.