Enterprises fix a sharp increase in prices and costs, monitoring of the Central Bank showed

The results of the August monitoring of enterprises published by the Bank of Russia show a noticeable deterioration in the assessments of the current state of business activity in the main sectors of the economy and stabilization of respondents’ expectations for the next quarter in response to a sharp depreciation of the ruble and an increase in the key rate by the regulator. Estimates of the increase in selling prices and costs suffered the most. Such a reaction is only the beginning of a cooling cycle for the Russian economy.

In July 2023, according to monitoring by the Bank of Russia of more than 14,000 non-financial enterprises in key economic activities, the index of current estimates of demand, outputs and prices of respondent companies fell to virtually zero – from 2.1 to 0.2 points amid stabilization of expectations for the next three months at the level of 10.3 points, and the resulting business climate index (BCI) decreased in August to 5.2 from 6.2 points in July. Companies’ assessments of current and expected output, price growth suffered most of all, while estimates of expected demand even grew slightly against the background of lower assessments of its current state.

Current business climate assessments have declined in most economic activities, most notably in the transport complex (here the assessments turned negative for the first time since April 2023), wholesale trade and processing aimed at private consumption. Against the backdrop of a general stabilization of expectations at the level of July, in trade in motor vehicles, agriculture, investment processing and water supply, expectations improved markedly, while in mining and wholesale trade they continued to decline. Among the main factors limiting output, the companies named a shortage of personnel (primarily workers), a significant increase in costs and lengthening of delivery times due to difficulties with logistics. Note that the Gaidar Institute’s August estimates of industrial optimism index, on the contrary, improved in terms of current and expected estimates of output and demand, worsening only in terms of a sharp increase in inventories – to their noticeable excess.

The latter, however, “can be seen as a positive signal, since it means that enterprises are ready for demand growth and support for the current output, part of which is sent by manufacturers to finished product warehouses,” believes Sergey Tsukhlo, the author of the estimates.

Meanwhile, the price expectations of enterprises in August in the economy as a whole increased markedly and exceeded the average values ​​of 2021-2022, which they could not reach in July, the Central Bank notes.

The growth of price expectations was frontal, and the increase in the costs of enterprises in August accelerated in the economy, with the exception of only the electric power industry. The most noticeable increase was in the costs of trade, transportation and storage enterprises. “Among the main reasons are the rise in the cost of raw materials, materials and components against the backdrop of a weakening ruble, as well as a significant increase in the cost of fuels and lubricants and an increase in logistics costs,” analysts of the Central Bank explain. As a result, in August, compared to July, the increase in selling prices also accelerated (most noticeably in the trade in motor vehicles), and in agriculture, an increase in current prices was recorded for the first time since August 2022. Most enterprises associated the increase in selling prices with the depreciation of the ruble. Thus, retailers expect that in the next three months, selling prices will grow on average at a rate of 12.6% in annual terms – this value was higher only in the spring of 2022.

“The dynamics of the CIB shows that the peak of the acceleration of economic growth occurred in March-May, and in June-July, growth began to slow down sharply. Reducing fiscal momentum and tightening monetary policy will inevitably lead to a further slowdown in growth. It cannot be ruled out that a mild recession may begin in the economy in the fourth quarter – a soft landing will be useful for an overheated economy, ”analysts believe Telegram channel MMI.

In turn, Alexander Isakov from Bloomberg Economics believes that the consensus of economists underestimates the impact of the key rate of the Central Bank on economic conditions.

“In the coming months, the effects on the level of business activity will become noticeable – investment, consumption, output. Our indicator of the likelihood of recessions after the rate hike has risen from 6% to 21%, about the level of 2018. This does not mean that the economy is already in recession, but it suggests that growth forecasts for 2023-2024 are likely to be revised downwards,” he concludes.

Artem Chugunov