Russian economy is stagnating
The Russian economy is stagnating and Russian President Vladimir Putin’s plan to revitalize it with his 12 national projects is starting very slowly.
Preliminary figures from Rosstat show that Russian gross domestic product (GDP) growth in the first three months of the year was only 0.5% year-on-year, a figure well below the most conservative forecasts . The impetus that growth is supposed to derive from 25.7 trillion rubles (390 billion dollars) of investments planned for the 12 national projects is still at least two years away and the administration is still arguing over how much to allocate to which project.
The positive effects of this spending are expected to push GDP growth to over 3% by 2021, but economists remain skeptical about the feasibility of this goal.
BCS Global Markets chief economist Vladimir Tikhomirov attributed the underperformance in the first quarter of 2019 to three factors: low consumption as consumers had to absorb the increase in retirement age and a Higher VAT in January, along with much warmer and unpredictable winters that reduce output of utilities, a large contributor to the GDP count, as well as slower growth in state military orders.
Tikhomirov warns that public investment has remained de facto the main engine of economic growth. Foreign direct investment (FDI) has fallen to next to nothing and if the money reinvested by foreign companies already working in Russia (which counts as FDI) is discounted, then FDI is actually negative because some small foreign investors have left Russia as the economy grew more and more moribund.
If the state investment is poorly executed, national projects may not accelerate GDP this year, as there is no indication that the major projects in the program are about to be launched.
At the end of 2018, the Central Bank of Russia (CBR) was forecasting growth in the order of 1 to 1.5% for 2019 and that now looks optimistic, while analysts polled by Bloomberg forecast growth of 1.2% this year. . Even Russia’s Ministry of Economic Development, which has updated its forecast monthly, now expects only 0.8% growth this year, well below the surprising and controversial 2.7% growth recorded in 2018. .
The 2 percentage point increase in the VAT rate in January appears to have boosted wholesale trade at the end of last year pending a rate hike. The fall in this trade after the introduction of the tax is one of the reasons why growth has fallen so sharply and is therefore seen as a temporary effect.
Wholesale activity in the first quarter of this year contracted 7.4% year-on-year, even as retail sales rose 1.8%, in part due to a mild winter. And the state has slowed defense purchases, which are now included in the GDP calculation, as Russia begins to halt its military modernization program.
And finally, real incomes are stagnating and are expected to remain so in 2019, as the government has no plans to distribute more money to the public through new benefits or public sector pay increases. In 2018, real incomes of Russians fell 0.2% from 2017 and 8.3% from 2013, according to the Federal State Statistics Service. The Ministry of Economic Development predicts that this year will see the first increase in the real disposable income of the population in five years, which will increase by 1% in 2019, according to official forecasts.
“The real disposable income of the population in the first quarter of 2019 decreased by 2.3% compared to the first quarter of 2018. In order to set a minimum growth (100.1%) for the whole year, real income available population must grow in the second to fourth quarters at a rate of at least 1 percent per quarter. But in order to reach the level of the forecast indicator taken into account in the calculations of Federal Law No. 459-FZ (101 percent), quarterly growth is expected to be above 2% per quarter, ”Rosstat said in a statement in May.
“Given the current trends and the fact that in 2019 no significant new monetary measures of social support for citizens are expected, there are risks of keeping the dynamics of this indicator in a negative zone”, added the agency.
Better prospects for the second half
The outlook for the second half of the year is slightly better. After several quarters of weakness, Russian wage growth is likely to pick up a bit in the coming months as public sector wages increase and labor market conditions continue to tighten, Capital Economics said in a note in May. . “This should mean that GDP growth is holding up better than consensus anticipates for the remainder of 2019,” the consulting firm said in a note.
The VAT hike also hit wages, as the nominal wage increase of just 5.5% year-on-year in the first quarter was almost entirely absorbed by the similar rise in inflation.
However, since the inflationary effect of VAT has been very moderate, according to CBR economists, inflation should quickly fall back to the CBR’s 4% target, which will give a few percentage points a boost. percentage to real wage increases in the process. .
Inflation is currently 5.3 percent. Coupled with a sharp slowdown in industrial production in March, analysts now expect the CBR to improve things further for real wages by cutting rates earlier than expected in June. This will revive growth in the second half of this year.
The mood of the population has improved slightly as inflation expectations among the population are falling by more than 9 percent and slowly converging with the actual inflation rate. This should support consumption in the second half of the year and will also make it easier for the CBR to lower rates.
Overall, the first quarter results were mixed and the situation will improve slightly in the second thanks to Russia’s strong macroeconomic fundamentals. But to really make a noticeable difference in people’s lives, national projects have to work and it is not happening yet.
Putin is already feeling the pressure after state pollster VTsIOM reported that confidence in the president fell to its lowest level in nearly two decades, to 31% in May from more than 70% he ten years ago.
Slow progress in implementing national plans has led Putin to chew on MPs on live television and fueled tensions between different branches of government.
The Kremlin has placed great emphasis on national projects which are the state’s main investment program, but critics say insufficient attention has been paid to improving the environment for people. business and that state-led investments alone will not be sufficient to stimulate growth to achieve the target of 3% GDP growth by 2021. At most, the program could increase the economic potential of Russia by 0.5%, the International Monetary Fund said, Bloomberg reports, and most other economists are forecasting growth below 3% for 2021.
“The projects are divided into 13 focus areas, each managed by a different set of officials and ministers with granular benchmarks to be achieved, such as building 180 war memorials by 2024 and improving the freight train speed of 28% on average. What is missing are crucial details like how the larger of the projects will be financed and how they will help the economy, ”Russian economist Scott Johnson said as quoted by Bloomberg.
Much of the program’s first year has already been lost due to internal squabbles over which projects to include and how to fund them. A $ 5 billion rail bridge to Sakhalin Island was scrapped after authorities figured out how few trains would use it. A high-speed connection from Moscow to Kazan was abandoned because it was too expensive. All programs need to be carefully evaluated, but there is a sense of urgency as Putin pushes for results. This conflict prepares the program to repeat the mistakes of the Soviet Union when officials used to “storm the plan” to achieve the goals set by Gosplan for their economic efficiency.
If the plan is unsuccessful and the Russian economy continues to grow below 3%, it will lag behind the rest of the world. What this means in practice is that while life will continue to improve in Russia, it will improve more slowly than the world economy and it will slowly but inevitably fall behind, which means lower levels. relative living conditions and economic stagnation.
This article is taken from the bne IntelliNews Russia monthly report.
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