The dynamics of capital investment in Russia may soon deteriorate significantly

Leading indicators point to a sharp cooling in the supply of investment goods, a drawdown in companies’ investment plans and a reduction in related programs in the fourth quarter of 2023. Among the reasons, analysts cite, on the one hand, the collapse of imports of investment goods and the slowdown in construction, and on the other, an increase in the share of excess capacity against the backdrop of cooling demand and output, as well as an increase in the cost of bank loans.

The investment activity index of the Center for Macroeconomic Analysis and Short-Term Forecasting (CMAP), based on an assessment of the supply of investment goods in the economy (import and domestic production of machinery, equipment and construction materials), fell sharply in October 2023 – by 5.8% compared to the previous month ( seasonality is eliminated). As a result, the indicator returned to the average monthly level of 2019, losing all the positive momentum accumulated since the beginning of this year (see chart). The main contribution to the decline in the index was made by a decrease in imports of machinery and equipment, despite the fact that their production remains quite stable, analysts note. However, the supply of basic building materials decreased only slightly less significantly – by 4.3%. As a result, the October level of the indicator, as well as the supply of investment goods in general, more or less corresponded to the average monthly levels of 2019.

Let us recall that in the third quarter of 2023, Rosstat continued to record a noticeable increase in capital investments, including, as Raiffeisenbank analysts noted, due to a noticeable decrease in the cost of investment goods (see Kommersant on December 7). According to CMAKP calculations, taking into account seasonality, in the third quarter the growth of investment in fixed assets remained, but slowed down to 2.3%, after it was 2.2% in the first quarter, and accelerated to 5.4% in the second. “This dynamics is in striking contradiction with the increasingly negative dynamics of the supply of investment goods and is explained either by the continuation of the construction boom in the third quarter (it died down in October), or by such a specific component of investment as military equipment,” conclude the authors of the calculations. According to their estimates, in construction it is now possible to “quite definitely say that growth has given way to stagnation, if not slight contraction – albeit at a historically maximum level”: in the second quarter, the sector grew by 0.6% on average per month, taking into account seasonality; in July – by 0.3%, in August – by 1.4%, and in September and October – it contracted by 0.5% and 0.7%, respectively.

Company surveys also indicate a weakening of investment activity in the fourth quarter. In October 2023, according to market surveys of industrialists by the Gaidar Institute (IEP), companies’ investment plans lost optimism after the July record for the third month in a row – and during these months the balance decreased by 14 points, now amounting to a relatively modest plus five points. This, as is the case with the CMACP estimates, corresponds to the level at the beginning of 2023 and is close to the average for 2019.

“Such a negative adjustment of investment plans by Russian industry can be explained by an increase in the share of enterprises that assess their capacity as excess. This figure, after a historical (31-year) minimum recorded in April 2023 and amounting to 9%, increased to 18% by October,” the IEP explained what was happening, recording in December a negative correction in respondents’ assessments of output and demand (see “ Kommersant” dated December 21). A similar deterioration of the situation in December is reported in the small and medium-sized business sector. According to PSB estimates, we recall (see Kommersant on December 22), the expansion of investment programs is hampered, among other things, by lack of access to finance and labor shortages – only 19% of companies increased investments (minimum since February), reduced – 8% (maximum) .

Artem Chugunov