No Loosening

Private consumption alone is supporting growth. In the absence of other growth drivers, the economy is struggling to deliver even 2% growth. The government intends to launch infrastructure projects to boost growth but is unwilling to take the risk of switching to a looser policy mix. The CBR sticks to keeping the refinancing rate stable and allows the ruble to depreciate. MinFin benefits from the weaker ruble that makes it possible to generate fiscal surpluses despite lower export revenues. In anticipation of difficult times in the years ahead, belt tightening is on the agenda. Under these conditions, there is a little hope for rapid acceleration unless the rest of the world delivers a good surprise.

Private consumption alone drives growth
Economic growth during the first half of the 2013 was the slowest since the recession of 2009: GDP grew by only 1.4% y/y. The advanced indicator (index of output in basic sectors) points to further slowing at only 0.3% y/y from January-July 2013. industrial performance has been flat since the beginning of the year, and its August performance (+0.1% y/y) offers little hope for a rapid rebound. Extraction sector resists, but manufacturing and utilities production are slightly contracting. Agricultural output performed better (+3.3% y/y in January-August) but not enough to compensate for the stagnation in industry.

Private consumption alone drives growth. Retail sales expanded by 3.9% y/y over the first eight months of 2013, benefiting from the strong rise in wages (+5.5% y/y in real terms) and record low unemployment (5.2% in July 2013, according to ILO methodology). The sustained private consumption fuels imports that expanded by 4.4% in nominal terms in the first half of 2013. In seasonally adjusted terms, investment has been flat since the beginning of 2012 and the sentiment among producers points to a very slow recovery at best. External demand provides little support for growth. Exports contracted by 3.8% y/y in nominal terms over the first half of 2013, reflecting the weak global growth dynamics and low demand for commodities.

Inflation trend in reverse
After an acceleration from a record low of 3.7% y/y in June 2012 to 7.4% in May 2013, the trend in inflation is reversing (Chart 1). In August 2013 the year-on-year increase in consumer prices reached 6.5%. The seasonal decline in food prices was offset by the hike in utilities prices that resulted from the indexation of tariffs of natural monopolies. High inflation affects consumption moderately (the wages are rising faster), but it hits the companies’ competitiveness. To break this cost-price spiral and to support industry, the government decided to freeze the tariffs of natural monopolies in 2014 and to cap their increase in 2015-2016 by the past-year inflation for companies. For households the tariffs will grow at a pace 30% lower than inflation.

BY Anna DORBEC

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