TOPIC OF THE WEEK: Analysis of growth drivers points to upside risks to economic performance in 2024

CAUCASUS / CENTRAL ASIA - Report 12 Apr 2024 by Ivan Tchakarov

The publication of the national accounts data for 4Q23 allows us to investigate in more detail the breakdown of growth drivers across Caucasus and Central Asia economies for the year (2023) as a whole. The most salient feature of our analysis is that the counter-intuitive (and counter-cyclical) impulse to 2022 GDP growth from net exports has given way in 2023 to the more standard distribution of growth drivers, in which domestic demand and, in particular, consumer spending plays a key role. This is inevitably linked to the conclusions in our previous CCA Weekly, in which we argued that the one-off sizable improvement of CAs in 2022 on the back of excess monetary inflows (remittances) from Russia has mostly come to an end in 2023 as CCA current accounts (ex-Azerbaijan) are now firmly in their "normal" deficit positions.

This rotation of growth drivers has effectively re-engineered what we consider the standard modus operandi in EMs whereby robust GDP growth co-exists with negative growth contributions from net exports and positive growth contributions from domestic demand. This status quo, however, gives us a good vantage point to think about growth drivers in 2024 as we anticipate that the fillip from internal drivers will carry through the whole year. In particular, low inflation has created a backdrop against which real wage growth in the region has accelerated significantly and boosted consumer spending. This underlying growth impetus emerged strongly in 2H23 and is still projecting itself robustly in 2024. The early-year data from Armenia, Azerbaijan, Georgia, Uzbekistan and Tajikistan is indeed pointing to stronger growth than we anticipated in our 2024 Outlook, which we dubbed “Less growth, less risk”.

To be sure, growth will still be lower this year, but less so than we forecast back in December. Recognizing this underlying consumer-driven momentum, we have upgraded our 2024 CCA GDP growth to 5.8 percent from 4.7 percent previously (6.3 percent in 2022). Azerbaijan will still be the only CCA economy with accelerating growth, but the rest of our countries will see only a modest deceleration of the pace of economic activity.

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