What is the impact of Central Bank policy on business activity?

Leading indicators of business activity from the Central Bank, based on surveys of companies in various sectors, record a rapid revival of the economy – both in terms of output and demand. Analysts differed in their assessment of this result. Some conclude that the tightening of the Central Bank’s monetary policy does not cool the economy and the regulator needs to put more effort into this. Others, citing alternative leading indicators, note that the “cooling” in the real sector has apparently already begun.

The indicator of the business climate in the main sectors of the economy, published by the Bank of Russia, showed a noticeable improvement in business sentiment (the survey was conducted December 1–13). The improvement in the indicator was largely observed in assessments of the current state of affairs – an increase from minus 0.3 points in October to plus 0.9 points in November (these are estimates of both demand and output). The expectations indicator grew less – from 14 to 14.5 points (companies expect demand growth rather than output growth in the next three months).

Most of all, assessments of the current state of affairs improved in mining (their deterioration slowed by more than half), in processing (the index grew from 4.9 to 6.5 points), in services (the index became positive for the first time since July), in agriculture (indicator continues to grow confidently) and in retail (the index slowed its decline from minus 7.7 to minus 1.1 points). Estimates of current output and demand in the transport industry, wholesale trade and construction sectors have worsened. Current production estimates rose for the second month in a row in November, with gains in manufacturing, retail and services. The situation was assessed most negatively in wholesale trade, where the deterioration in the dynamics of current sales was associated with problems in logistics and its noticeable rise in price. Estimates of current demand in November increased in agriculture, services and industry, but in processing – only among consumer goods producers. The most significant decline in demand was observed in the motor vehicle trade.

“The data obtained are taken into account by the Bank of Russia when making decisions on monetary policy,” the Central Bank explained. Enterprise price expectations in November rose from 22.8 to 23.3 points (a historically very high level) after their decline in the previous month, and estimates of cost dynamics decreased for the second month in a row. Analysts on the MMI Telegram channel conclude: “Business optimism shows that the tightening of monetary policy did not have a noticeable impact on the dynamics of output. Overheated domestic demand, allowing companies to pass on costs to consumers, fully compensates for all problems.”

Meanwhile, not all observers come to such conclusions. The PMI-S&P Global composite index (industry and services) in November recorded the minimum positive level of business activity since July 2023. “The overall rate of cost-push inflation was the lowest since June. Companies’ efforts to stimulate sales led to the weakest increase in selling prices in five months,” the authors of this study note.

By the end of the year, the Industrial Optimism Index (as of December 14) and the Industrial Forecast Index (as of December 20), measured by the Gaidar Institute (IEP), showed a noticeable negative correction – 4 and 5.5 points, respectively. In the first case, the institute’s data record a noticeable (by 5 points) decrease in production plans against the backdrop of an increase in finished product inventories, which led to an increase in their balance (“above the norm” minus “below the norm”) to plus 6 points. “Such a high value of this indicator has not been recorded since July 2020,” notes the IEP. In the second case, the main reason for the correction was a negative adjustment in demand forecasts, which in December decreased by 6 points to a ten-month low, but remained “in the positive.” “According to enterprises’ estimates, demand growth at the beginning of 2024 will continue, although not as intense as in March-December 2023,” analysts record. Against this background, the balance of production plans decreased by 7 points – to the worst value in March-December.

Artem Chugunov