Experts argued with the new economic forecast of the Central Bank

The Central Bank, following the IMF, changed the forecast of Russian GDP and allowed its growth at the end of the year. In the autumn of last 2022, a recession was expected. At the same time, the regulator has not yet changed a number of other estimates, for example, the forecast range for inflation. Experts interviewed by Vedomosti are in no hurry to correct their estimates in a positive way. Moreover, despite the improvement by the Bank of Russia of the macroeconomic forecast as a whole, the regulator’s signal to the market was rather harsh: the tightening of monetary policy during the year may neutralize reasons for optimism, analysts say.

Reasons for revision

The main reason for updating the forecast in plus is the growth of government spending, said the chief economist “BCS The world of investments” Natalia Lavrova. The transfer of budget spending to the beginning of the year, as well as their sharp increase at the end of last year, will contribute to economic growth in 2023, and not shift this effect to the next one, she pointed out. The postponement of spending to the beginning of the year will be more likely to be a factor in replacing private spending than a driver that can lead to a sharp increase in private consumption and accelerate growth in the face of external restrictions, Lavrova said.

The higher adaptability of the Russian economy to transformation in the face of sanctions has improved the forecast for GDP dynamics in 2023, said the chief analyst Sovcombank Mikhail Vasiliev: as a result, statistics in many respects turned out to be better than the Central Bank’s forecasts. For example, the decline in GDP last year was not 3-3.5%, as expected by the Bank of Russia in October, but about 2.5%, unemployment in December remained at a historic low of 3.7%, and oil production in December, January and February did not decline contrary to market expectations, the expert explained.

In 2023, the main drivers of GDP will be a recovery in trade, as well as construction and engineering within the military-industrial complex, believes Sergey Grishunin, managing director of the NRA rating service: at the same time, resource industries will remain in recession, as adaptation to sanctions takes time. The forecast of the NRA assumes a recession in the economy at the end of the year in the range of 1-1.5%. He proceeds from the fact that the Central Bank will have to raise the rate at the next meetings due to rising inflation and the budget deficit, the expert explained. The tightening of the monetary policy, in particular, will have a bad effect on investment and construction, in connection with which a negative dynamics of GDP is likely, Grishunin added.

The forecast range for the dynamics of Russia’s GDP this year should have been narrowed immediately, Denis Popov, chief analyst at PSB, noted: the previous one was too wide for a short-term forecast. There was no reason to focus on its lower limit (a 4% decline), since the economy developed better than expected throughout 2022, he added. The expansion of the scope of the GDP forecast for 2024 is logical in the face of high uncertainty, Popov added: the fact that it happened at the expense of the lower limit of the forecast is probably the result of a noticeable increase in the statistical base (improved GDP forecast for 2023). The forecast for 2024 could be slightly lowered due to an increase in the assessment for the current year, Vasilyev agrees.

In the baseline forecast, the decline in Russian GDP in 2023 will be at the level of 2–2.5%, Lavrov expects. Such dynamics will be driven by worsening external conditions, lower net exports and continued weak private consumption, she explained. A reversal to a slight recovery is expected from the second half of the year, the expert added. The dynamics of GDP at the end of the year will most likely be negative, agrees Dmitry Kulikov, director of the ACRA group of sovereign and regional ratings. In 2023, the economy will decline by 0.7%, Popov predicts.

How the Central Bank explained the new forecast

On Friday, February 10, the Bank of Russia released an updated medium-term macro forecast, in particular, improving estimates of the dynamics of Russian GDP for 2023: now it is expected from minus 1 to plus 1% instead of a decline of 1–4%. At the same time, the estimate for the next year has been downgraded to 0.5–2.5% from 1.5–2.5%.

The Central Bank expects quarterly GDP growth in annual terms to begin in mid-2023, Elvira Nabiullina, head of the regulator, said at a press conference. The economy is actively adapting to the ongoing changes, she noted. According to the Bank of Russia, GDP for 2022 decreased by 2.5%. The improvement in the forecast for GDP dynamics for this year is associated both with an upward revision of estimates of previous periods, and with more significant budget spending than was taken into account in the October forecast of the Central Bank, Nabiullina explained.

The risks of a global recession, she said, have subsided. Opening China’s economy after the removal of covid restrictions, approaching the peak of rate hikes by the central banks of developed countries, lower prices in the energy markets, primarily in Europe, favorably affects the economies of developing countries, including Russia’s key trading partners, Nabiullina explained. However, the positive impact of this factor on Russia will be restrained by sanctions, she stated. The negative impact of existing external restrictions on the potential of the Russian economy may be stronger, the Central Bank also indicated in its press release following the meeting of the board of directors.

In addition to the Central Bank, the growth of the Russian economy in 2023 was also allowed earlier in February by First Deputy Prime Minister Andrey Belousov. “Now I’m not ready to give probabilistic forecasts, but we will work to make it happen,” he noted. Prior to this, the International Monetary Fund (IMF) improved its forecasts for the Russian economy for 2023, which instead of falling by 2.3% now expects growth by 0.3%. According to the results of 2022, the IMF estimated the decline in Russia’s GDP at 2.2%. The estimates of the fund’s experts are beginning to converge with Russian forecasts, a representative of the Ministry of Economic Development noted. The Ministry of Economy will update its estimates for the current and subsequent years in accordance with the regulations within the scenario conditions for the forecast of socio-economic development. According to the latest forecast of the department, by the end of 2023, the Russian economy will decline by 0.8%.

What will happen to the rate and inflation

Following the results of the February meeting of the Board of Directors, the Bank of Russia decided to keep the key rate at 7.5%. The inflation forecast for this year remained at the level of 5-7%. To achieve it, a higher trajectory of the key rate may be required than expected in October, the regulator pointed out. The possibility of its reduction in 2023 is not excluded, but the probability and scale have decreased, the Central Bank concluded.

If weekly inflation continues to remain above the seasonal norm in the near future, then at the next meeting on March 17, the key rate is likely to increase by 25 basis points, to 7.75%, Vasiliev believes. In the base scenario, the expert expects the rate to rise to 8% in the middle of the year and remain at this level until the end of the year.

There is a high probability that the Central Bank will raise the rate to 8% in March, Grishunin believes. If monthly inflation continues to remain relatively high, the regulator may raise the rate by 50 bp. in March-April – in one step or in two steps, Anton Tabakh, chief economist at the Expert RA rating agency, believes. At the same time, this is unlikely to worsen the dynamics of GDP, the expert believes.

An increase in the rate should not be expected at least until the end of the third quarter, Popov does not agree. Such actions are unlikely with annual inflation of 3%, which will be observed in the II quarter, he explained. In general, the pronounced realization of pro-inflationary risks is not predetermined, and the task of supporting the active transformation of the economy, including monetary measures, will remain relevant throughout the year, the expert added.

Inflation is likely to meet the Central Bank’s forecast, Vasiliev believes. In the base scenario, according to the expert’s expectations, by the end of this year it will be 7%. A stronger global recession, a deeper decline in commodity prices and a sharper depreciation of the ruble, as well as a widening budget deficit, could prevent this forecast from being realized, he said. In the baseline forecast, annual inflation rates will fall below 4% in April, and roll back to 6-6.7% in the second half of the year, Kulikov expects.

The Central Bank’s forecast for inflation is highly probable, Popov believes: it takes into account both the effects of the statistical base and the level of inflationary costs from the action of a recovery growth in consumption. Additional budget spending and a worsening external environment may hinder the achievement of the Central Bank’s forecast for inflation in 2023, Tabakh believes. At the same time, under current scenarios, inflation should slow down to 6.5%, the expert expects. If inflation goes above 7%, then the Central Bank may raise the rate up to 300 bp, but such a scenario is now unlikely, Grishunin added.