20.09.23 Review

Demand Comes and Goes: The intensive growth of consumption in Russia will soon be replaced by stagnation, or even contraction

Consumer sentiment among Russians remained high at the end of summer, despite the rising price of imported goods and the growth of credit rates due to tighter monetary policy. At the same time, according to operational data, consumer spending has already started to stabilise. In 2022, this suffered a significant decline, but in 2023, rising wages, the availability of consumer credit, and the pent-up demand from 2022 have revved up the consumption engine. Following a sharp increase in the key interest rate, the consumer credit market has begun to contract again, and the prolonged impact of exchange rate movements on prices will push import prices upwards. Therefore, stagnation or even a slight contraction of consumer demand and a deterioration of consumer sentiment should be expected in the coming months.

Despite the acceleration of inflation and rising interest rates on loans, the level of consumer sentiment in Russia, after a period of rapid growth in the first half of the year, remains high today. For example, Rosstat's consumer confidence index improved by 2 percentage points to -13% in the third quarter of this year. This is compared to an improvement of 3 p.p. In the second quarter, and 5 in the first quarter. These negative values indicate that the proportion of negative responses still exceeds the proportion of positive ones; this index has been in the negative zone for the past 10 years.

The August survey conducted by 'inFOM' also indicates an improvement in consumer sentiment. The composite value of the consumer sentiment index reached 106 points. This level was reached back in April, but it then slightly decreased due to the expectations sub-index. Meanwhile, respondents' assessments of the current situation of households have been rising all this time. Traditionally, sub-indices reflecting expectations are noticeably higher than assessments of the current situation. However, the widening gap between these indices may be a sign of a crisis, the experts from the Center for Macroeconomic Analysis and Forecasting (CMACF) warn in a report on income and consumption dynamics in 2022-2023: 'The gap between optimistic expectations for the future and the assessment of the current material situation... creates risks of a situation reversal in case of sharp shocks, as unfulfilled positive expectations and wasted credit of trust can lead to an increase in social tension.’

Consumer sentiment index of the Russian population, 2021-2023, points

Consumption in Russia only began to actively grow in the second quarter of 2023. By the end of 2022, retail turnover had dropped below the level of 2018. This decline was particularly significant in non-food retail, but food retail was also affected. As Re:Russia has previously reported, the cause of this was not a decrease in income (which remained nearly unchanged) but the rise in consumer credit rates and changes in supply structures. Consumers needed time to adapt to unfamiliar new products and the increasing prices of familiar ones. 'Unfavourable economic conditions, high uncertainty, and negative consumer sentiments have increased the population's propensity to save, which can be characterised as a crisis,' the experts from the Center for Macroeconomic Analysis and Forecasting (CMACF) added. Sales of cars and spare parts decreased most significantly. According to the Central Bank's calculations, in the first two months of 2023, the physical volume of such sales lagged behind those of the same period in 2022 by 61.7%. Sales of household appliances dropped by 30-40%, computers and mobile phones by 16%, and clothing by 10%. The service sector was the only one that saw noticeable growth in 2022 and early 2023, predominantly due to Moscow and St. Petersburg, as well as the country’s southern regions, according to the Central Bank's report on regional economics.

In the first half of 2023, real wages and lending, in the absence of new shocks such as the announcement of mobilisation at the beginning of September 2022, finally revived consumption. According to Rosstat data, real incomes increased by 4.4% in the first quarter compared to the same period of last year, and in the second quarter, they grew by 5.3%. The growth in the volume of consumer loans also accelerated significantly after interest rate cuts, the Central Bank noted in its reviews of the banking sector. In the first quarter of 2023, the portfolio growth rate reached 2.5% (compared to 1.3% in the fourth quarter of 2022), and in the second quarter, it reached 4.5%. As a result, the annual growth rate approached 12%. In May, banks issued 1.41 trillion rubles to citizens, setting a record, according to analysts at Frank RG. This exceeded figures from December 2022 (1.38 trillion rubles) and December 2021 (1.39 trillion rubles). However, these numbers continued to rise: in June – 1.47 trillion roubles were issued, in July – 1.53 trillion, and in August – 1.81 trillion. In total, over eight months, the lending volume exceeded the value of the same period in 2022 by 54%, according to calculations by Frank RG.

By the end of summer, consumption had generally stabilised, according to CMACF experts. In July, two out of three of the main components declined: food sales and the provision of services. Sales of non-food items were still growing at the end of summer due to last year's pent-up demand and increased consumer credit. The proportion of those surveyed by 'inFOM' who said they would prefer not to save their disposable income but to spend it on expensive goods increased to 32% in August (+2.3 p.p. compared to July). This growth was likely due to the sharp devaluation of the ruble, which made consumers eager to make large purchases before prices rose.

The rapid growth of consumption has led some economists to talk about possible new growth drivers for the Russian economy. However, Presidential Assistant Maxim Oreshkin cited the soft monetary policy of the Central Bank as the main cause of the ruble's devaluation. Indeed, the rapid recovery of consumer lending appears to have made a significant contribution to consumption growth. However, now, following the Central Bank’s sharp rise of the key rate, consumer lending rates are rising as well. Of the three factors that contributed to the sharp revival in consumption in the first half of this year – rising wages, low consumer loan rates, and pent-up demand – only the first will continue to work. Moreover, the exchange rate pass-through effect following the summer devaluation of the ruble has been delayed, so in the coming months, stagnation or even a contraction of consumption, as well as a decrease in consumer confidence, should be expected.