Economic overheating will be record high at the end of 2023 and may continue into recession

The macroeconomic report of Rosstat for January-October 2023 allows us to note the continued rapid growth of business activity and domestic demand – both private consumption and investment – against the backdrop of a deteriorating situation in the labor market and the continuing rise in inflation. The year will end with very high GDP growth – above 3%, due to which growth in 2024 for purely statistical reasons may cease. A number of analysts believe that a technical recession for two quarters is also possible. The spillover effects from the 2023 overheat will likely be significant events next year.

According to the Ministry of Economy, published yesterday, in October 2023, the Russian Federation’s GDP exceeded the level of last year by 5% (in September – by 5.6%), and the level of two years ago – by 1.8% (by 1.5% in September) . Excluding seasonality, the economy grew by 0.3% in October compared to growth of 0.5% a month earlier. “In general, over the ten months of 2023, GDP grew by 3.2% year-on-year, compared to the level of two years ago by 1.1%,” the department records, confirming the estimates of Economy Minister Maxim Reshetnikov. Let us recall that in early November he promised that by the end of the year the economy would grow by more than 3%, with the ministry forecasting 2.3% and the Central Bank forecasting 2.2–2.7%. Three percent GDP growth against the backdrop of sanctions has apparently already been overcome, although just six months ago such a forecast would have looked completely implausible.

Bloomberg Economics makes similar estimates, estimating annual growth in the total output of non-financial industries as a part of GDP in the fourth quarter of 2023 at 5–5.5%. This also means economic growth in the range of 3–3.5% for the year. The main contribution to growth will be made by wholesale trade – against the backdrop of an increase in trade in vehicles compared to last year – and processing, notes the author of these estimates, Alexander Isakov. A very rapid annual growth in processing in October by 9.5% (with a decrease in output by 0.4% in October, taking into account seasonality), as in the previous six months, according to the Ministry of Economy, 85% was provided by three industries: mechanical engineering (at 4.5 p.p.), chemistry and metallurgy. “The effect of the SVO stimulating factor still remains. If export restrictions in metallurgy and the oil industry are weakened, then we can wait until the end of the year, here we can expect a slightly positive or neutral effect by the end of the year for industry,” notes Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-Term Forecasting (CMACF).

Output growth is supported by high consumer and investment demand.

The former increased in October, despite the tightening of monetary policy and the cooling of unsecured consumer lending (see “Kommersant” dated November 28). According to the Ministry of Economy, the growth of the total volume of consumer spending of citizens – the total turnover of retail, catering and paid services – in October in annual terms accelerated to plus 10.7% from 10% a month earlier (plus 3.3% by October 2021) and to 5.3% for ten months. Adjusted for seasonality, the figure for October increased by 1.1% after growing by 1% the previous month. The corresponding estimate of the Center for International Relations is slightly weaker – 0.7% versus 0.2%, respectively, but the October dynamics of spending turned out to be the highest since May 2023, primarily for equipment and cars (by value).

Against this background, “investment activity in the third quarter of 2023 turned out to be much higher than expected,” the Ministry of Economy noted.

Growth for the full range of organizations is 13.3% versus 12.6% in annual terms a quarter earlier (plus 10% over ten months), and taking into account the seasonality factor for the third quarter – 5.6% versus 6.3%, respectively. It is impossible to attribute all this growth to public investment – this is a much more complex process, in which the weakening of competition in the domestic market after the departure of foreign companies from the Russian Federation in a number of sectors, and the impossibility of Russian companies investing in “unfriendly” countries, and the restructuring of logistics are important. , requiring investment, and a large number of other factors that coincided in time: large state support, including non-financial support, only creates a general framework for the process.

As a result, economists will continue to record the ongoing noticeable overheating of the economy – in addition to achieving high figures for GDP and industrial production, there are many negative effects, some of which will become clear only in 2024-2025. According to analysts’ calculations Telegram– channel “Hard Figures”, operational estimates of GDP for weighted output in basic sectors indicate that real output in October updated its historical maximum, being approximately 0.7% higher than the peak of December 2021, and has already deviated by approximately 2.3% from historical trend. “Upward revisions to growth figures for 2023 should come along with a reduction in estimates for 2024—raising the key rate to 15% would cool price growth but raise the risk of a recession in the next six months above 70%,” Bloomberg Economics writes.

Meanwhile, restrictions on the labor market continue to intensify.

After stabilizing for three months, unemployment again reached a historical low in October and amounted to 2.9% of the labor force. In October, the demand for labor exceeded supply by 100 thousand people, the Center estimated that in September, compared to August, according to the center’s analysts, real wages decreased by 0.4%. Annual inflation as of November 27, according to the Ministry of Economy, increased to 7.5%. Inflation and distortions in the labor market should be considered only the first “visible” effect of overheating; the main problem of growth above potential, apparently, should be considered ineffective and erroneous investments: not everything that actively pushed economic growth in the second half of 2023 was really necessary build: in the next few quarters, part of these investments will be written off or will not give the expected return on invested capital.

Artem Chugunov, Dmitry Butrin