Dreams of demand keep the market from cooling down

Data from monitoring enterprises in the main sectors of the Russian economy, which is carried out by the Bank of Russia, in October 2023 recorded a noticeable increase in the traditional gap between assessments of the current situation and the expectations of companies, recording growing demand expectations against the backdrop of declining output. Analysts believe that in such conditions, the Central Bank’s policy is not tough enough to cool the overheated economy, allowing for a recession in 2024 with a high probability.

The Bank of Russia business climate indicator increased in October to 6.2 points (in September – 6 points) due to improved expectations. The index of the current state of the business environment fell from 1 to minus 0.4 points, while expectations rose from 11.1 to 13. The first estimates went negative for the first time since the beginning of this year amid a sharp deterioration in estimates of output (this year’s minimum) and demand (minimum since the first quarter of 2023) and an equally noticeable decrease in current estimates of selling prices, their forecasts and costs (maximum since the second quarter of 2022).

The most noticeable deterioration in current output volumes and demand was recorded in industry (especially in mining and processing, focused on private consumption; according to Rosstat, output growth in the sector in July-August was zero), as well as in wholesale trade and services against the background of the same a noticeable improvement in corresponding expectations. It is noteworthy that the October surveys of industrialists of the Gaidar Institute also recorded a rapid increase in the optimism of companies due to the positive dynamics of demand (according to the Central Bank, it was observed only in the production of investment goods), the balance of changes of which increased over the month from 0 to plus 8 points and reached the best values ​​with February 2022 – however, against the backdrop of a reduction in release plans in September-October by 7 points. An increase in demand estimates and a decrease in production plans was noted along with a decrease in the shortage of finished goods inventories. An increase in current output and demand, as well as expectations, according to the estimates of the Central Bank and companies, was observed in October in retail trade, construction and transport.

“The value of the current situation index allows us to say that the economy is balancing between growth and recession. But it’s not about demand. The demand index has been in positive territory for the last three months, while the output index has been in negative territory. Demand is growing, but output is decreasing (apparently due to a shortage of resources and sanctions restrictions),” analysts from the MMI Telegram channel comment on the Central Bank data, noting that the improvement in expectations is occurring against the backdrop of a tightening of monetary policy (monetary policy). Monetary policy is unlikely to reach the required level of stringency to cool overheated demand, they conclude.

The latest consensus forecast of Russian macroeconomists seems to hold a similar opinion; it was updated by the Central Bank at the end of last week (MMI is part of it). The consensus is that achieving the inflation target requires a tighter monetary policy than the Central Bank’s forecasts imply, and suggests raising the key rate to 15% at the end of the year and an average key rate of 12.6% in 2024, with inflation at 7% at the end 2023 and 5.1% at the end of 2024 (Central Bank forecast – 6–7% and 4%, respectively). The economy, according to analysts, will continue to warm up at least until the end of 2023, including due to increased growth in real wages (6.1% according to median estimates) and a shortage of personnel (see monitoring). “Increasing the key rate to 14% (we are talking about the meeting of the Board of Directors of the Bank of Russia on October 27.— “Kommersant”) will help cool price increases, but will raise the risk of a recession in the next six months above 70%. The difference in the yield curves of short and long OFZ rates clearly indicates an increase in the risk of recession due to cooling of credit. The market expects at least a twofold increase in the rate until the end of the first quarter of 2024 and its peak at 15.25%, with a decline starting in the second quarter of 2024,” notes Alexander Isakov from Bloomberg Economics, recalling that macroeconomic statistics reflect a cooling of business activity with a large lagging behind, and the labor market last.

Artem Chugunov