ArmInfo. There are signs of expanding external demand, primarily reflected in the increase in the number and duration of visits to Armenia, which creates significant risks of accelerated growth in wages and service prices in various sectors.
At the same time, due to restrictions on exports to Russia, risks of excess supply of goods in the domestic market, as well as weakening consumer and investor confidence, remain. This was noted in the rationale presented on November 3 by Central Bank of Armenia Chairman Martin Galstyan for the Central Bank Board's decision to raise the refinancing rate by 0.25 percentage points, from 6.75% to 7%.
According to him, economic activity in Armenia slowed somewhat in the third quarter of 2026 (from 7.6% to 6.9% y/y in January-September), in part due to the ongoing neutralization of non-structural growth factors. Economic growth continued to be significantly driven by developments in the construction and services sectors, indicating excess demand. This is also reflected in high growth rates for final consumer goods imports and retail trade.
Amid high uncertainty regarding the duration of regional conflicts and prospects for their resolution, the risks of further weakening demand in the global economy and, at the same time, increasing inflationary pressures are gradually becoming more noticeable. In the US, high and expanding investment activity in the AI (artificial intelligence) sector, on the one hand, and concerns about fiscal stability, on the other, carry risks of a possible increase in long-term neutral interest rates, with a corresponding impact on neutral rates and capital flows in developing countries. In the Eurozone and Russia, despite a weak recovery in economic growth in recent quarters, structural problems remain, limiting the prospects for medium-term economic growth. Amid ongoing tensions in the Middle East and concerns about the stability of supply chains, energy prices continued to remain high, and the gradual drawdown of accumulated inventories increased the market's vulnerability to potential new supply shocks. At the same time, accelerated growth in global food prices is being recorded, driven by both ongoing geopolitical events and unfavorable weather conditions. In this context, there are significant risks of further interest rate hikes by central banks in leading countries and their prolonged maintenance at high levels. Given the aforementioned risks and existing uncertainties, the Central Bank Council considered Type A scenarios associated with an increase in neutral interest rates in the global economy, the emergence of conditions of higher demand in the domestic economy, and the risk of a prolonged increase in inflationary pressures amid protracted regional conflicts, which would require a higher monetary policy rate trajectory compared to market expectations. On the other hand, the Central Bank Board discussed Type B scenarios associated with a slowdown in global economic growth, weakening investment and consumer confidence amid uncertainty regarding the outlook for economic relations with Russia, and a fundamental decline in Armenia's country risk premium, which implies a lower trajectory for the monetary policy rate compared to market expectations.
As a result, emphasizing the need to manage the macroeconomic implications of Type A scenarios, the Central Bank Board decided to raise the key rate by 0.25 percentage points this time. The Central Bank Board will continue to monitor economic development scenarios and is prepared to respond appropriately to ensure the 3% inflation target and price stability in the medium term.
Domestic and external demand remain high
In Q3 2026, economic activity in Armenia slowed somewhat, but remained at high levels. The slight slowdown in growth in recent months primarily reflects a decline in certain segments of the manufacturing industry related to re-exports and does not indicate a broad-based weakening of economic activity. It is worth noting that, excluding the impact of the aforementioned factors, positive trends in the manufacturing industry as a whole remain; however, the sector remains vulnerable to potential disruptions in trade chains due to the escalating conflict in the Middle East, as well as restrictions on exports to Russia and the slowdown in the Russian economy. Conversely, the ongoing decline in the agricultural sector also had a somewhat dampening effect on economic growth, likely reflecting the impact of both unfavorable weather conditions and export restrictions to Russia. Although the damage caused by export restrictions to Russia has not yet been noticeable, uncertainty surrounding the duration and scope of the restrictions may also constrain investment activity in Armenia.
At the same time, the mining industry continues to experience outpacing growth, reflecting a recovery in production volumes after the decline of the previous year. The expected launch of the Amulsar gold mine could also provide a significant additional stimulus for economic growth, expanding mining production capacity and export volumes. The development of the ICT (information and communications technology) sector continued to contribute significantly to economic growth, driven by ongoing investments in AI and gradual integration into the global IT infrastructure. Furthermore, the slowdown in capital goods imports, which has accompanied the development of the AI infrastructure in recent months, may indicate a gradual transition from the investment phase to the operational phase, which will create opportunities for export expansion in the near future. The aforementioned processes, depending on the progress of investment programs and the added value generated in the domestic economy, could significantly expand the economy's production and export potential in the medium term.
Nevertheless, despite a certain strengthening of prospects for expansion of activity and capacity in certain, more productive sectors of the economy, economic activity remains driven primarily by the development of services and construction, indicating continued high levels of both domestic and external demand. In particular, the accelerated growth of construction was accompanied by a significant increase in real estate prices, while growth in the services sector remains relatively widespread. These processes may partially reflect an increase in the number of visits from Russia to Armenia, including the return of Armenian citizens, which is due to a significant increase in uncertainty surrounding the security situation and economic prospects in Russia.
Although some of these flows may return to Russia if security concerns ease, growing interest in real estate and financial assets in Armenia may indicate an intention for longer-term economic engagement on the part of some of them. This, in turn, could contribute to maintaining high levels of domestic demand and asset prices even as tourist flows weaken somewhat.
High economic growth throughout 2026 and its structural characteristics, as well as improved tax administration, contributed to high rates of tax revenue growth—outpacing nominal economic growth. Exceeding the tax collection plan significantly mitigated the risks of a widening budget deficit stemming from rising current expenditures since the beginning of the year. At the same time, strong tax revenue performance was matched by strong performance on current expenditures, particularly social spending. In particular, expenditures planned for the universal health insurance system in January-September 2026 already amounted to approximately 120% of the annual planned volume, indicating cost overruns and additional pressure on domestic demand.
On the other hand, capital expenditure performance remains low, declining by approximately 25.3% year-on-year in January-September 2026. Although historically, a significant portion of capital expenditures is carried out late in the year, the significant planned increase in non-defense capital expenditures in the coming years, amid limited capacity to implement large-scale programs, increases the risk of an even greater underperformance compared to historical trends. This creates uncertainty both in terms of short-term economic growth prospects and the expansion of medium-term production potential.
The growth of non-resident workers in the labor market is significantly accelerating.
Current processes in the labor market as a whole may indicate the absence of significant imbalances between supply and demand in the economy. The number of officially registered workers continues to grow at a stable rate, and the unemployment rate fluctuates between 12-14%. On the other hand, nominal wage growth in the private sector is slowing somewhat, remaining within the 4-5% range.
Nevertheless, labor supply in Armenia has also increased slightly recently. This may be due to a decrease in labor migration flows to the Russian Federation amid the gradual tightening of Russian migration policy and the existing uncertainty surrounding the economic outlook, as well as the high activity of the construction sector in Armenia. At the same time, the rate of growth in the number of non-resident workers in the labor market has accelerated significantly in recent months. From this perspective, the significant growth in labor supply may, to a certain extent, mask (hide) the impact of high economic activity on the labor market. Moreover, in a number of service sector subsectors, alongside the recorded high activity, there has also been a significant acceleration in wage growth – up to 10-12% – and a decrease in the concentration of growth in the sector as a whole, which may reflect expanding demand conditions.
Inflation Exceeds Target
In Q3 2026, annual inflation continued to rise above the target level (3%, +/- 1 percentage point), reaching 4.3% in September, while annual core inflation reached 4.7%, compared to 3.7% and 3.5%, respectively, the year before. This still primarily reflects the inflationary impact transmitted from imported and locally produced non-seasonal food products, driven by inflationary pressure transmitted from the global economy in recent quarters, as well as by individual supply factors in the domestic economy. At the same time, the acceleration of core inflation across product groups is gradually becoming more widespread, which, in addition to supply factors, indicates the emergence of strong demand conditions.
Amid ongoing tensions in the Middle East and other regional conflicts, price growth trends in global commodity markets continue. Amid high energy price volatility, disruptions to trade routes, and significant increases in freight and insurance costs, price growth for non-food products has also accelerated significantly, with only a partial impact on the domestic economy so far.
The Index of Hard Prices for Non-Exportable Goods (IHPNC) maintained its upward trend in September, reaching 4.4% year-on-year. The acceleration of fixed price growth was still driven primarily by rising housing rents and expanding external demand. However, inflation in a number of other services characterized by fixed prices is also showing an accelerating trend, indicating a likely expansion of demand conditions in the domestic economy. On the other hand, despite a certain increase in inflationary pressure in the ILCST basket, certain indicators—in particular, the relative stability of the weight of commodity groups and services that change the price in the basket—may indicate the anchoring of inflation expectations.
The yield curve has shifted upward along its entire length
The risk map of Armenian financial market participants reflects, on the one hand, concerns about inflation above the target level, excess domestic demand, and high energy prices due to geopolitical processes, and, on the other hand, the risks of a gradual easing of inflationary pressure, restrictions on exports to Russia, and a slowdown in economic growth in the medium term.
Following the previous decision of the Central Bank of Armenia Board to raise the key rate from 6.5% to 6.75% on September 15, the yield curve has shifted upward along its entire length in 2026: in the short-term segment, approximately By 0.4 percentage points, and by approximately 0.7 percentage points in the long term. This may be due to changes in financial market participants' expectations regarding the path of the Central Bank of Armenia's monetary policy rate (the short- and medium-term segments of the curve), an upward shift in the US yield curve and expectations of monetary policy tightening, as well as a certain overestimation of the country risk premium for emerging economies in general and Armenia in particular.
Armenia's country risk premium continues to form at low levels
Despite a slight increase recently recorded, Armenia's country risk premium continues to form at low levels, and the share of non-residents in dram-denominated government bonds has not decreased. This may be due to both general trends in developing countries and factors specific to Armenia, in particular the gradual easing of security risks, the continued strengthening of macroeconomic stability amid various geopolitical events, Armenia's relatively lower vulnerability to these events, the presence of relatively stable energy sources and prices, and other factors.
High Uncertainty Regarding Global Economic Growth Prospects Remains
High uncertainty surrounding global economic growth prospects remains in place in the third quarter of 2026. On the one hand, ongoing geopolitical tensions in the Middle East and ongoing disruptions to trade routes contribute to high energy prices and their volatility, as well as the materialization of risks of further weakening economic growth. On the other hand, increased investment activity, driven by optimistic expectations surrounding the development of AI (artificial intelligence), particularly in the United States, is contributing to accelerated economic growth.
United States. US economic growth has accelerated in recent quarters, reaching a seasonally adjusted 3.4% quarter-on-quarter (QoQ) in Q3 2026, up from 2.2% in Q2. Private consumption and fixed investment, particularly related to AI, remain the main drivers of economic growth. However, uncertainty surrounding the effective use of technology, as well as potential subsequent price adjustments in financial assets, pose downside risks to the economic growth outlook.
US Treasury yields rose amid inflationary pressures stemming from high energy prices amid expanding demand, increased debt financing needed for AI, and concerns about fiscal stability. In particular, the yield on 10-year US Treasury notes exceeded 5% in October. It's worth noting that risks of further deterioration in the fiscal balance and, consequently, the public debt trajectory remain, driven by the need to expand defense spending and the shortfall in expected customs duty revenue. Such developments could impact the neutral interest rate and capital flows in the US and, consequently, in developing countries.
Headline and core inflation in the US continue to rise above target. At the same time, amid high energy price volatility and significant uncertainty surrounding their outlook, risks of a worsening inflation environment persist. Under these circumstances, the US Federal Reserve raised its key interest rate by 0.25 percentage points in September, to 3.75-4%. Despite leaving the Fed's rate unchanged in October, financial markets expect further hikes in the near future.
Eurozone In Q3 2026, economic growth in the Eurozone slowed slightly to 0.4% (q/q), and uncertainty surrounding the medium-term outlook remains high. On the one hand, the accumulation of structural problems and the negative consequences of the conflict in the Middle East are holding back economic growth, while on the other hand, positive expectations regarding investment in AI, the military-industrial complex, and infrastructure are supporting growth prospects to a certain extent, although they have not yet fully materialized. Amid persistently high energy prices and significant supply vulnerabilities, annual inflation accelerated, reaching 3.8% in September, while core inflation remained relatively stable at 2.5% y/y. Under these conditions, the ECB increased the refinancing rate by 0.25 percentage points. Amid tightening monetary policy, the continuous deepening of fiscal risks, particularly in certain economies, is contributing to an even greater rise in long-term interest rates. In particular, the shift in investor sentiment is most pronounced in France, where the risks of a return to fiscal stability remain significant. In this context, the main uncertainty is whether problems surrounding fiscal and debt stability could translate into a further deterioration in investment and consumer confidence in the Eurozone.
Russia. In the second quarter of 2026, economic growth in Russia accelerated somewhat. Investment activity recovered to a certain extent, accompanied by an increase in imports of investment goods. Fiscal policy continues to contribute positively to growth, and prolonged high energy prices could expand fiscal space. On the other hand, structural problems in certain sectors of the economy remain, as do risks of a deterioration in the security situation. At the same time, inflationary pressure has increased again, including as a result of disruptions in fuel production and damage to warehouses, while inflation expectations remain high.
Oil Prices. Along with ongoing tensions in the Middle East, global oil prices are at historically high levels. Despite the restoration of a significant portion of oil shipments through the Strait of Hormuz, continued high prices are driven by concerns about supply stability, significant increases in freight and insurance costs, and other factors. Furthermore, significant drawdowns of strategic oil reserves in leading economies have increased the global economy's vulnerability to further oil supply shocks. On the other hand, continued supply expansion from non-OPEC+ countries and a possible contraction in global demand could mitigate the impact of such shocks. High energy prices, as well as disruptions to trade routes and supply chains amid escalating regional conflicts, are further driving up food prices, particularly for grain, vegetable oils, and sugar.
