Economic trends in the South Caucasus: why Azerbaijan is slowing while its neighbours grow faster
The economy in the South Caucasus
According to newly released official data, Azerbaijan’s economy contracted by 0.3% in real terms in the first quarter of 2026 compared with the same period last year.
The State Statistics Committee said value added in the oil and gas sector fell by 1.2%, while growth in the non-oil sector was limited to just 0.2%.
At the same time, current indicators in Georgia and Armenia point to positive economic momentum.
What do the figures show?
According to Azerbaijan’s quarterly GDP data, the economy totalled 29,703.2 million manats (approximately $17,472.5 million) in January–March 2026. Industry accounted for 33.5% of GDP, followed by trade and vehicle repair at 11.3%, transport and storage at 7.1%, construction at 4.6%, accommodation and food services at 3.2%, and information and communication at 2.0%.
In Georgia, a rapid estimate by Geostat for February 2026 put GDP growth at 8.8%, with an average of 8.4% for January–February.
In Armenia, according to preliminary data from the Statistical Committee, the economic activity index reached 107.4 in January–February 2026, marking a year-on-year increase of 7.4%.
Why did Azerbaijan’s economy contract?
The reasons for the downturn are clearly reflected in official statistics. Value added in the oil and gas sector fell by 1.2%, while growth in the non-oil sector reached just 0.2%. As a result, the decline in the energy sector outweighed the modest gains elsewhere, pushing overall GDP into negative territory.
One key factor behind this trend is the depletion of mature oil fields and the natural decline in production.
According to official infographics from the Ministry of Energy, total oil output fell from 50.8 million tonnes in 2010 to 27.7 million tonnes in 2025. Production at the ACG block declined from 40.5 million tonnes to 16.2 million tonnes over the same period. Against this backdrop of long-term decline, even small fluctuations in the oil and gas sector have a more immediate impact on overall macroeconomic indicators.
An additional drag in the first quarter came from a sharp contraction in construction. The State Statistics Committee reported a 19.8% real-term decline in the sector. While there are pockets of growth in the non-oil economy — for example, a 9.2% increase in information and communications — this sector accounts for only 2.0% of GDP, limiting its overall impact. In other words, the observed growth remains too small in scale to significantly influence the broader economic trajectory.
Which sectors are driving growth in Georgia and Armenia?
Georgia’s estimate for February 2026 shows that growth is being supported by several sectors, including information and communications, transport and storage, finance and insurance, manufacturing, and mining. The same report also notes declines in construction and energy, pointing to a more diversified growth structure overall.
Tourism and services also play a significant role in Georgia’s economy. A February review by the Parliamentary Budget Office, citing Geostat’s preliminary estimate for January, highlights “hotels and restaurants” among the main contributors to economic growth. The review also notes that remittance inflows reached $282.6 million in January.
In Armenia, the 7.4% increase in the economic activity index in January–February is also broad-based. Industrial output rose by 17.2%, construction by 20.5%, and services (excluding trade) by 7.2%, while trade turnover increased by 3.3%. This combination suggests that domestic economic activity is expanding simultaneously across multiple sectors.
Regional comparison: why do the results differ?
The dominance of the oil and gas sector makes Azerbaijan’s macroeconomic performance more sensitive to fluctuations in this industry. The World Bank highlights that heavy reliance on hydrocarbons — amid declining oil output, price volatility and the global energy transition — remains a key source of vulnerability for long-term growth.
These structural features are also reflected in foreign trade. According to the US International Trade Administration, energy products accounted for around 87% of Azerbaijan’s total exports in 2024. This level of dependence means that changes in production and prices are more quickly transmitted to the real economy.
Georgia and Armenia, by contrast, show more diversified growth patterns, driven by services, logistics and the information technology sector. This increases the likelihood that weakness in one area can be at least partly offset by strength in others.
Long-term implications, risks and opportunities for Azerbaijan
The first-quarter results for 2026 once again bring the need for diversification to the forefront. Non-oil growth of just 0.2% is not sufficient to offset the decline in the oil and gas sector. At the same time, official data from the State Statistics Committee point to positive trends in areas such as ICT, trade, tourism and transport. If growth in these non-oil sectors becomes more substantial, it could help reduce volatility and improve the economy’s resilience.
Among the key risks are the continued natural decline in oil production and high volatility in sectors such as construction. On the opportunity side is the expansion of higher-productivity non-oil industries and an increase in their share of GDP.
In the medium term, the central issue is whether growth in the non-oil sector can expand not only in percentage terms but also in its overall contribution to GDP. According to first-quarter data, despite growth in ICT and trade, construction saw a sharp contraction. This underlines the importance of more balanced growth across sectors and of maintaining stable levels of investment.
Against the backdrop of strong growth in Georgia and Armenia, Azerbaijan’s regional competitiveness is becoming an increasingly important economic question. Building a more stable growth model matters not only for headline GDP figures, but also for shaping expectations in the investment and business environment.
The economy in the South Caucasus
