Baku, November 20, AZERTAC
Consumption is the main driver of Armenian economy. The contribution of the consumption to the 7.6% GDP growth in 2019 was 10.8%, of which private consumption expenditures contributed 9.3%. In 2019 household consumption made 82.8% of the expenditures. Household final consumption expenditure partly compensates the low gross capital formation, and the chronic deficit of the current account balance.
AZERTAC presents an article by the Center for Analysis of Economic Reforms and Communication of Azerbaijan.
In Armenia economic activity index declined 9.8% in August 2020, compared to the same period of the last year. In October the IMF forecasts 4.5% decline in GDP for 2020. The forecasts reflects the drop in most of the expenditure factors of GDP. CAB/GDP deficit in Armenia is expected to be widen to -8.8% GDP in 2020 according to IMF. The recent economic uncertainties, political instabilities and military operations would further reduce the FDI stock in Armenia. Economic Intelligence Unit (EIU) forecasts 6% decline in gross fixed investment to GDP in 2020. However, government consumption expenditures to GDP ratio is expected to rise 13.4 percent, mainly affected by the government's coronavirus stimulus package. The health expenditures also put substantial burden to the budget considering exceptionally high infection rates per capita in Armenia. The recent government budget discussions are mainly focused on the rise of military spending which is expected to have low fiscal multiplier effect on the economy.
Thus, the other expenditure factors would not compensate for the reduction of the main driver of Armenian economy. According to EIU, the ratio of private consumption to GDP is expected to decline by 8.2% in 2020. Services are forecasted to decline by 4.6%.
The economic indicators in Armenia conditions the consumption to decline. The reduction in remittances, low real wages, virus-related restrictions, unemployment, suspending businesses, uncertainties and worsening expectations lowers the household consumption. Ongoing military operations and mobilizing the material and labor resources of the country for the war accelerated this reduction.
With 11 percent ratio to GDP, remittances are an important and the most stable driver of GDP growth in Armenia and it supports the private consumption. This demonstrates high dependency of the economy from external factors.
As a result of the external shocks in the wake of the coronavirus pandemic the remittances in the first half of 2020 fell by 22% compared to the same period of the previous year. As Russia is the primary source of remittance, the foreign currency inflows are highly affected by the dynamics of Russian economy which is exposed to fluctuation in oil price dynamics.
Unemployment and increasing poverty rates lead to decline in household consumption. IMF forecasts 22.3% and 21.1% unemployment rates in Armenia for 2020 and 2021 accordingly. Average monthly nominal wages in comparison with the same period of the last year declined 2.6% in August 2020. According to the UN Sustainable Development Goals Index, the number of people living in Armenia with a daily income of less than $ 3.2 is 6.5%.
The reduction of private consumption is manifested in variety of indicators. In January-August 2020 yoy imports declined by 12.4%. Imports of vehicles dropped in July 2020.
In January-August 2020, compared to the same period of the last year, trade turnover decreased by 11.5%, 0.5 percentage points higher than in January-July. Due to digitalization, the cash register turnover has decreased by only 2.5%. The volume of services which is also an important indicator for assessing the household consumption dropped by 10.8%.
The demand in the housing market is on decline too. The number of apartment transactions in Yerevan dropped by 60% yoy in second quarter of 2020. However the reduction moderated to 12% yoy in July supported by a 3% month over month increase in the stock of mortgage loans in July.
In Armenia out-of-pocket health expenditure is the highest among peers, at 80% of total health expenditure in contrast to 32% in emerging market counterparts.
The economic growth indicator is forecasted to show some improvement in 2021, however conditioned upon prolonged military operations and increasing coronavirus cases. With the current trends, main driver of GDP in Armenia - household consumption does not support the positive expectations.