The idea of ​​considering “overheating” of the economy as normal temperature has been accepted for discussion at the ministry

The first big meeting with the president on the draft three-year budget was devoted to the macro forecast of the Ministry of Economy. He is more optimistic than the expectations of the Central Bank and independent analytical structures. Although the trends of the second half of the year allow us to expect that the “overheating” of the economy will last until 2024, above-plan growth in 2025–2026 requires justification. The adoption of the Ministry of Economy’s version means a less conservative approach to three-year budget expenditures.

At a meeting on the formation of the federal budget for 2024, Vladimir Putin called the current situation in the economy “generally stable and balanced,” noting that GDP dynamics in 2023 turned out to be much better than the previous expectations of the Ministry of Economy: annual growth could be recorded at 2.5 -2.8% of GDP. The draft budget, according to the president, should be “objectively calculated” with an emphasis on social obligations – the meeting, based on the transcript, was devoted to the parameters of the medium-term budget forecast of the Ministry of Economy.

The Central Bank, like analysts, previously published its own forecasts, against the background of which the forecast of the Ministry of Economy (see Kommersant on September 12) looks overly optimistic. Thus, the Central Bank’s forecast suggests that in 2023 the economy will grow by no more than 1.5–2%, and in 2024 – by 0.5–1.5% (against the previous estimate of 0.5–2.5% ) against the backdrop of a slight decline in foreign trade and worse-than-expected investment growth due to the weakening ruble exchange rate. The Ministry of Economy anticipates an upcoming boom in private investment.

The forecast of 1.5–2% GDP growth against the backdrop of the fact that in the first half of the year the economy already grew by 1.6% means near-zero rates until the end of the year. “High-frequency data on economic dynamics show that in recent months, economic activity has begun to stagnate with a tendency toward a slight decline (and stagnation or decline is observed in both household consumption and investment). In industry, at the beginning of the third quarter, a pause in growth was recorded. If in June the slowdown in growth was associated primarily with a decrease in production intensity while maintaining growth in processing, then in July the growth stopped here too,” economists from the Center for MACP record in their September macroreview.

Previously, the slowdown in quarterly GDP growth to 0.1% in the second from 0.7% in the first quarter, taking into account seasonality, was recorded by the Central Bank (see Kommersant on September 11).

According to the Center for International Relations, the growth rate of GDP in real terms (for the rolling year July 2022 – June 2023) compared to the same period of the previous year was minus 0.8%. “This signals that the recession was still ongoing in June 2023,” the center’s analysts believe. In addition, the TsMAKP notes that tightening the monetary policy at the moment of exhaustion of old incentives for growth (construction and the military industry) and the possible formation of new motives, including those determined by private investment, which are disincentivized when the rate is raised, “could lead in the future to prolonged stagnation” . In the first quarter of the year, the contribution of gross profit to GDP growth became negative, and wages became the only positive component of income, which could also negatively affect investment.

However, for 2024, the Ministry of Economy’s assumption that GDP growth will continue above potential (the Central Bank estimates it at 1.5% in the medium term, and it is not obvious that the high level of government investment in 2023 managed to increase it) may be rational. Despite the Ministry of Finance leveling out budget expenditures within the year, the volume of spending in the fourth quarter is expected to be high – an additional budget impulse of an as yet unknown scale will last for at least six months.

Opponents of Maxim Reshetnikov’s department have significantly more questions regarding the medium-term forecast of the Ministry of Economy, which assumes GDP growth above 2% per year. Thus, the Ministry of Economy expects that unemployment will remain at 3.1% throughout the forecast period, and inflation will drop to 4% in 2024. “How consistent are an overheated economy (and the labor market in particular) and a sharp slowdown in inflation in 2024?” — the authors of the Telegram channel “Hard Figures” ask themselves. Analysts on the MMI Telegram channel are convinced that the Ministry of Economy’s forecasts for 2023–2024 are overestimated. In their opinion, the export figures in 2023 “look inadequate”—monthly exports should jump from $34 billion in January-August to $46 billion in September-December. This “error” in the calculations raises the GDP estimate to 2.8%. The forecast for 2024, in their opinion, does not take into account the impact of a strict monetary policy – the consequences of raising the Central Bank rate in August-September should peak within several quarters. In their opinion, the inflation forecast for 2023 is also inadequate – 7.5%. “GDP and inflation are inflated in order to inflate estimates of budget revenues and increase expenditures. Such an irresponsible approach to the forecast highlights the risks on the part of fiscal policy and may require the Central Bank to carry out a more stringent monetary policy,” the authors of the channel conclude.

But it is possible that the optimism of the medium-term forecast of the Ministry of Economy is explained more simply. The Bank of Russia’s revisions of its macro forecast this summer are hardly accidental and are unlikely to be determined by insufficient consideration of the results of government investment in 2022–2023. But this trend exists, and the Ministry of Economy has the right to assume that the “overheating” of 2023 will be longer, although it is not obvious how it can exist stably for two or three years. In any case, expecting relatively high growth in 2024 does not seem unusual. And the general optimistic view of 2025 and beyond from the point of view of the current budget policy (the real planning horizons of which are shrinking) looks justified: de facto, the budget in the current conditions looks more and more one-year than three-year. In 2024, its correction for 2025–2026 may be carried out under completely different macro conditions.

Artem Chugunov, Dmitry Butrin