22.03.23 Review

The Deficit Recovery: the business climate indicator has continued to show improvement thanks to the Russian government’s cash injections into the economy

The latest comprehensive survey of Russian companies by the country’s central bank has found that, in March, the business climate indicator reached the level seen in the second quarter of 2021 during the period of strong economic recovery following the COVID pandemic. Moreover, this level is one of the highest witnessed since 2014. The indicator reflects changes to the perceptions of businesses to the relative changes in their environment. For the last two consecutive months there has been a noticeable improvement in both their assessments of the current business environment and their short-term expectations. This positive trend has been observed across almost all sectors of the economy, with the exception of sectors related to the production of consumer goods and retail trade. This is indicative of the fact that the primary driver of this economic recovery has been the government's generous cash injections, while household demand remains weak. As a result, it is likely that we will see increasingly negative confidence levels from businesses after the upcoming reduction in budget spending, which has already been announced by the Ministry of Finance.

In March, the aggregate value of the Bank of Russia’s business climate indicator rose to 6.9 points, up from 5.5 points in the previous month. This marks the second consecutive month that businesses reported an improvement to current business conditions and short-term expectations for production and demand. In February, the value of the indicator surpassed the level seen prior to the initial wave of mobilisation in September 2022, and has now reached that of the second quarter of 2021, when the country was experiencing strong post-pandemic economic recovery.

In March's survey, the indicator for current business assessments was 0.4. This indicates that the number of enterprises reporting an improvement in their situation slightly outnumbered those that reported a deterioration. It is, however, worth noting that this is the first time since mid-2021 that the indicator has risen above 0. Between 2014 to 2021, the indicator was consistently in a negative state. The indicator’s shift to positive values implies a relative improvement in the business climate compared to the previous period. This is a significant result considering that, in recent years, negative assessments tended to prevail. 

The latest survey conducted by the Bank of Russia indicates that the most significant improvements in current business conditions have been observed in the wholesale trade and construction sectors. Conversely, there was a decline in assessments within mining, energy, water supply, automotive retail, and agricultural industries.

The indicator for short-term expectations increased from 11.8 to 13.5 points last month, marking five consecutive months of growth. If we examine the entire period since 2014, expectations were only higher in the second quarter of 2021. At the end of 2021, the average value of the expectations index was 11.4 points. Notably, there has been a significant improvement in the expectations of logisticians, and the most optimistic expectations have been observed in the agriculture sector.

The Bank of Russia’s business climate indicator, 2022–2023

For the second consecutive month, the balance of production estimates has remained positive, with the indicator reaching its long-time peak in March. This positive trend has been driven predominantly by construction, logistics, wholesale trade, and services. However, the automotive retail industry has been experiencing a clear decline as it has struggled to adapt to the departure of major automobile manufacturers from Russia. Companies in this sector have reported increased purchase prices due to the weakened ruble alongside rising logistics costs. Despite this, the balance of estimates for manufacturing output remains positive, with manufacturers of investment goods reporting the highest rates. This may be attributed to both the ongoing process of import substitution and the expansion of the military-industrial complex production base, as Re: Russia has previously reported here. Producers of intermediate goods have also reported a positive balance sheet, although this improvement was less significant. On the other hand, those manufacturing industries that produce consumer goods have not experienced such an upward trend, instead their balances have deteriorated, remaining in the red over the past month.

Demand estimates have reached their highest level since January 2022. The most significant growth has been witnessed in wholesale trade (with the exception of automobiles) and the production of consumer and intermediate goods. Enterprises that produce investment goods have reported a peak in their current demand estimates. However, for manufacturers of consumer goods, estimates are on the decline. Demand in the construction sector has continued to grow thanks to subsidised mortgage programs. Retail trade, on the other hand, has received the most negative assessments due to low demand.

The rate at which business costs have been rising has slowed, while price expectations have risen following two months of decline. This increase has been particularly notable in the trade sector. Additionally, prices in logistics and services are expected to increase as a result of  high demand.

‘In recent months, the strongest growth ... has occurred in processing, construction, transport, services — these are the industries that can be considered the epicentre of the latest wave of economic recovery,’ the MMI Telegram channel notes, summarising the results of the survey. ‘At the same time, the retail sector continues to struggle, and this is a clear indicator of weak consumer demand.’

In essence, the boost of the business climate indicator’s figures seems to have been fueled by significant cash injections from the government into the economy. However, sectors associated with household consumption, including consumer goods and retail, have continued to perform poorly. This growth in spending has resulted in a budget deficit of 2.58 trillion rubles in January–February 2023, which amounts to 88% of the total projected budget deficit for this year. Consequently, the Ministry of Finance has cautioned that the rate of spending will decrease significantly in March. As a result, it is likely that the business climate indicator will experience a corresponding decline, albeit with some delay.

The values of the business climate indicated are modified differences between the responses ‘the situation has improved’ and ‘the situation has worsened’. The summary indicator comprises two elements: an evaluation of the current business climate and a forecast of the expected business climate. Business leaders are asked to assess changes in demand and output both during the survey period and over the next three months. The Bank of Russia also separately calculates composite indices for demand and output. The survey examines approximately 14,000 enterprises across all significant economic sectors. Indicators for previous periods are incorporated based on complete data, accounting for questionnaires received after the preparation of operational information.