24.04.23 Review

The Business Climate Index Reaches Ten-Year High: the economy is benefiting from record-breaking export revenues, just as it did in 2013

In April, the Bank of Russia’s Business Climate Index, which is calculated using a comprehensive survey of Russian businesses, rose to levels last recorded in 2013. This surge in optimism can likely be explained by the record-breaking levels of export revenues flowing into the economy in 2022 in the form of government spending and investment. For three consecutive months, the businesses surveyed by the CBR have improved their current assessments of business conditions and their short-term expectations, with manufacturing industries faring the best. In April, a positive trend was observed in the household consumption sector, while the retail and service sector are hoping for a resurgence in demand as incomes rise. However, private consumption growth remains weak. Although public spending saw a sharp increase in April, it will inevitably begin to fall soon: more than a third of the government’s planned spending for the year has already been spent in just three and a half months. If government spending declines, businesses are likely to face a deterioration in the business climate and a decrease in optimism.

The Bank of Russia's business climate indicator rose to 8.3 points in April, up from 7.3 in March, reaching its highest level since June 2013. It is important to note that the indicator assesses the balance of businesses’ opinions regarding whether their conditions have improved or deteriorated compared to the preceding period. An increase in its value suggests that a broader range of enterprises have observed an improvement in their current situation. For the third consecutive month, businesses have reported an improvement in both current business conditions and their short-term expectations for production and demand.

The current optimism may seem paradoxical given the context of sanctions, the economic downturn in 2022, and a significant decline in output across a range of industries. However, it is worth remembering the impact of external income growth on Russia's economic dynamics, which are typically associated with a rise in its commodity export revenues. Last year, these revenues almost reached a record high of $590 billion, representing a 37% increase on the ten-year average. The last time such a surge occurred was in 2013. The primary means of introducing these revenues into the economy was through budget expenditures, which totalled over 10 trillion rubles between January and April.

The Business Conditions Index reached 1.8 points, up from 0.7 in March. More businesses reported an improvement in the situation than those reporting a deterioration, marking a departure from the negative zone recorded by the indicator for the past few years. Since mid-2021, the indicator had been hovering around zero, and prior to this it had been consistently negative from 2014 to 2021. The majority of industries have seen an improvement in the current business environment. The strongest improvement was recorded in the manufacturing sector, particularly among producers of investment goods like building materials and engineering products. However, last month, the energy sector, mining, and agriculture have experienced a decline in their current assessments of business conditions.

The Short-term Expectations Index rose from 14.1 to 15 points, continuing a growth streak, which has been taking place for the past six months. As is the case with current assessments, businesses’ short-term expectations are unusually optimistic. The last time the indicator climbed above 15 points was a decade ago. Expectations have improved significantly in the logistics, services, and construction sectors.

The Bank of Russia’s Business Climate Index, 2022–2023

For the third consecutive month, production estimates have been positive. Companies’ current assessments are at their highest levels in a decade. The most notable improvements have been observed in logistics, services, and trade, particularly in the retail sector, although the index is still recording a negative value in retail. Meanwhile, manufacturing has experienced a decline in evaluations, with the exception of manufacturers of investment goods who score highly in their assessments. Companies' expectations regarding production volumes have generally deteriorated, but improvements are expected by companies working in the service sector, transportation industry and retail trade. However, expectations in manufacturing (with the exception of process manufacturing), agricultural sector, wholesale trade, and automobile retail are less positive than they were a month ago.

For the first time since January 2022, the balance of demand estimates has shifted into the positive zone. Demand valuations in process manufacturing have reached a historic high. However, there has been a significant decline in the agricultural sector due to difficulties in selling last year's record harvest. After two months of slowdown, enterprise costs have grown at a slightly accelerated rate, and most businesses have been factoring these rising costs into their wholesale prices, with the exception of agricultural producers, who have been experiencing difficulties with sales. Price expectations also increased in April, but only marginally.

Whereas in March the increase in the business climate indicator appears to have been mainly thanks to generous budgetary injections, in April the household consumption sector also contributed to this growth. According to experts from the Bank of Russia's April review of Regional Economics (Re: Russia has previously written about this here), retail and service providers expect consumers to begin spending more as their incomes rise. This expectation is supported by a forecast of a record 5% increase in real wages in 2023. So far, however, the dynamics of demand have lagged behind wage growths. The Bank of Russia’s ‘inFom’ survey has shown that, in March, the proportion of Russians who have been saving their disposable income and avoiding expensive purchases was the highest it has been in the past two years. Therefore, while the economy has continued to absorb the record earnings from last year's exports mainly through government demand and public investment, private demand, which is another driver of economic activity, continues to lag significantly behind, despite showing signs of recovery. If government spending declines, businesses are likely to experience a deterioration in the business climate and a decline in optimism.

The Bank of Russia's business climate index is a measure that reflects the modified difference in responses between the answers ‘the situation has improved’ and ‘the situation has worsened’. The index is made up of two components: one that evaluates the current business climate and one that evaluates the expected business climate. To calculate this figure, the Bank of Russia asks business executives to rate changes in demand and output during the survey period and over the next three months. In addition, composite indices for demand and output are calculated separately. The survey includes around 14,000 enterprises across all major sectors of the economy. The indices for previous periods are compiled using complete data, including surveys received after the preparation of operational information.