the economy has already passed the peak of recovery growth

At the border of the second and third quarters of 2023, that is, now, the Russian economy has recovered to the level of the end of 2021 in terms of most indicators, including consumption levels, further growth will be more moderate. A faster-than-expected economic recovery is across all sectors, there is a recovery in lending in the corporate sector as well, and the impact on the fiscal stimulus recovery going forward is likely to be exaggerated. These are the main theses of the Central Bank in the latest version of the Monetary Policy Report (MPR). In industry, growth potential remains, limited only by the situation on the labor market, the main economic problems of the Russian Federation are people and closed export markets.

July report of the Bank of Russia on monetary policy, published Central Bank on Monday, explains the logic of the unexpected for analysts raise by 1 percentage point (pp) of the key rate. The view of Bank of Russia economists on the current state of the country’s economy, reflected in the change in the macro forecast (mainly to indicators for 2023 and, to a lesser extent, for 2024), is determined in a number of cases by qualitative, and not only quantitative changes in the nature of estimates. In fact, the main thesis of the Bank of Russia in the report is the assumption that the second quarter of 2023 was both a local peak of economic activity and a period of reaching the indicators achieved in the fourth quarter of 2021 (on the eve of the Russian military operation in Ukraine and the retaliatory sanctions pressure from G7 countries).

“The recovery phase of the economy as a whole is coming to an end – by the end of 2023, the economy will return to the level of 2021 or even slightly exceed it,” the text of the report states.

For a number of indicators – for example, in terms of consumer activity dynamics, levels of final consumption, including households, gross capital formation, the level of 2021 has already been reached at the end of 2022 or at the beginning of 2023 – GDP dynamics in this case was limited already in 2022 only sharply reduced net imports due to sanctions.

• The Central Bank assumes that in the third quarter of 2023, GDP will grow by 3.6% year-on-year against 4.8% in the second quarter, in the last quarter of the year it will be 1.5% and will remain at this level over the next year. 2025-2026 slightly increasing.

In the calculations of the Bank of Russia, the peak value of GDP dynamics coincides with the peak value of the current account balance and the balance of goods and services: in anticipation of the Central Bank, it will stabilize at the current low level in the third quarter and later, remaining active and comparable to the balance in 2016 and 2020.

The nature of the current revival in the Bank of Russia is already, of course, considered frontal. Thus, according to the Central Bank, “a significant contribution to the growth of lending was made not only by retail, but also by corporate lending”, which ensured the growth of the forecast for M2 dynamics, while secondary effects caused, among other things, by “the continued flow of funds from foreign currency deposits into ruble deposits”, will work weaker from 2024 – the dynamics of M2 and M2X will converge.

Activity in the economy is accompanied by a “noticeable increase in value added” in construction and real estate, transportation and storage, financial activities and the agro-complex, with the largest negative contribution coming from lagging trade and production.

In many ways, what is happening is ensured by the utilization of production capacities, and it is in production that it is even higher (about 82%) than in processing (76%), while the failure in utilization in 2022 was extremely insignificant. In contrast to the demand for labor, in the calculations of the Central Bank, the peak of employers’ need for workers fell just in the last pre-war quarter of 2021, in the fall of 2022 it was the smallest since the beginning of the current crisis and has been steadily growing since then, now exceeding January levels by 15-17% 2020.

Restrictions on the labor market, as understood by economists of the Bank of Russia, are the most important obstacle to faster growth – the main obstacle, we recall, is considered to be restrictions on export markets, which have deprived the Russian budget of a significant part of oil and gas revenues. In processing itself, therefore, there is still potential for loading, and the situation there is quite good – “growth in manufacturing was observed in all large groups of goods – investment, intermediate and consumer,” the Central Bank states. Nevertheless, the opinion about a clear shortage of workers in processing is confirmed: if, in general, in the economy, real wages, which fell by 6-7% in 2022 due to a surge in inflation, recovered to their previous level already at the beginning of 2023, then they are in processing. recovered and grew faster: by the end of 2021, real wages in the entire economy grew by 4.5%, in the manufacturing industry – by 9%.

Given the relatively high investment activity and restrictions on the import of high-performance industrial equipment, the “labor” crisis in the industry is already in full swing.

However, it does not follow from the calculations of the Bank of Russia that its exacerbations can lead the economy or its individual sectors to stagnation; we are mainly talking about limiting the potential for growth at a low level, but not stopping it.

In the report, the Central Bank economists do not abandon their main assumption about the nature of future economic development – about the gradual and slow replacement of external demand in the Russian Federation by domestic demand – but do not focus on structural changes, as before. On the other hand, the Bank of Russia has reason to believe that the contribution of fiscal stimulus to future recovery growth, in contrast to the current one, is rather exaggerated: the Central Bank’s calculations of the structural budget deficit in 2018–2023 in the report show a certain normalization of the situation with budget expenditures already in the second quarter of 2023 Since the beginning of 2022, the stimulus of previous quarters has exceeded the “COVID” one, the accumulated stimulus contribution is “significant” (estimated at 4.6–5.4 percentage points of GDP), but the Bank of Russia does not expect the continuation of fiscal stimulus in comparable volumes.

Dmitry Butrin