The Russian economy is continuing to 'deviate upwards from the trajectory of balanced growth’, and in the first quarter of this year, it may have even grown faster than in the fourth quarter of 2023, according to experts at the Central Bank in their latest ‘What the Trends Say’ report. Thus, the economy remains overheated. The sources of growth, as before, are high government and consumer demand, as well as some recovery in non-oil and gas exports. According to Alexander Isakov, Bloomberg Economics' chief economist for Russia, the gap between output and demand in the first quarter could have amounted to 3% of GDP.
A significant factor supporting overheating at the beginning of the year was growing consumer demand. The monthly increase in retail trade turnover in February accelerated to a twelve-month high of 1.4% - up from 1% in the previous few months, note Central Bank analysts. Moreover, the acceleration is observed in non-food products. Consumption growth has been spurred by rising incomes and increased consumer confidence. Real disposable incomes grew by 5.4% in 2023, and this year they could grow by another 3–3.2%, according to the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF). In addition to this stimulus, the increased cost of foreign travel redirected a significant portion of consumer demand towards domestic tourism, the service sector, and Russian durable goods.
Consumer lending volumes are also on the rise. As we have previously reported, a record increase in deposits has allowed banks, despite the extremely high key rate, to increase lending rates only slightly (→ Re:Russia: The Two Tap Policy). Consumer lending resumed growth at the beginning of the year, and in March, it accelerated to 2% after two months of growth at 0.9%, according to the latest report from the Central Bank on the development of the banking sector. Auto lending is growing even faster, and mortgage lending has accelerated due to the ongoing government programmes. The consumer frenzy and readiness to take out loans at relatively high rates may 'reflect confidence in future incomes given the labour market situation’, the Central Bank analysts note. As a result, the Real Consumer Spending Index, calculated by SberIndex, jumped from its December value of 108.9 to 112.99 in March. In 2023, it took nine months for the index to rise by four points, between March and December. Additionally, the index value finally exceeded the February 2022 value (109.55).
This optimism is demonstrated not only by consumers but also by manufacturers. For example, the Central Bank's business climate indicator decreased slightly in April (from 10.6 to 10.1 points), but remains at a peak (at the same time, the main factors limiting business activity, according to enterprises, are not only the all too familiar 'labour shortage' but also difficulties in payments for imports). The Manufacturing sector’s Purchasing Managers' Index (PMI) reached its highest value since August 2006. Such growth rates in the number of new orders were last observed in 2008. According to a survey conducted by economist Sergey Tsukhlo, the results of which are cited by RBC, 'such a high level of demand satisfaction has not been recorded since February 2022'.
Alongside the consumer boom, the acceleration of growth and heightened optimism among businesses in the first quarter can be explained by budgetary peculiarities. As in 2023, the first months of the year saw substantial advance funding of budget expenditures. The volume of federal budget expenditures at the end of the first quarter exceeded 9.3 trillion rubles, which is 20% higher than the level of the same period in 2023. In January-February, advance expenditures led to an increase in the budget deficit to almost the planned annual amount at just under 1.5 trillion rubles, or 0.8% of GDP. Notably, a year ago, following similar budget execution logic, conjunctural surveys showed record optimism in March-April, after which evaluations began to decline.
The Central Bank's conjunctural survey also records a noticeable strengthening of investment activity in the first quarter, predominantly in manufacturing industries, as well as in trade and service enterprises. Investments in manufacturing may indicate both further expansion of military production and ongoing import substitution in some sectors. Meanwhile, the high cost of borrowing does not deter investments because they are being driven by government orders and budget expenditures. The fact that a 16% rate has not affected investments and has not cooled the economy over the past six months indicates that this tool, under conditions of intense budgetary pumping, works in a non-standard way and becomes a burden only for the segment of the economy not linked to government orders. The Russian economy operates like two interconnected chambers, one of which is an oven, and the other is a refrigerator. This is how the displacement of private business by the state occurs, as the MMI Telegram channel has commented on the situation.
However, inflation is decreasing, albeit slowly. In March, the seasonally adjusted annual price growth was 4.5%, which is close to the target pursued by the Central Bank (4%); however, this was due to one-off factors, and inflation rose again in April. Annual inflation remains at 7.8%. It may accelerate further, the MMI channel suggests, as prices for some goods could have been artificially restrained in the run-up to the presidential elections. Sustainable price growth of almost 4% has yet to materialise, according to the authors of the 'What the Trends Say' report. At the same time, they describe the current monetary policy as 'moderately tough'. Even if the key rate is not raised, the Russian economy will still begin to cool in the coming months, according to Bloomberg Economics. The rising cost of debt servicing will finally slow down retail lending growth, and the government's abandonment of subsidised mortgage programmes and tax increases will drive corporate lending growth. The first rate cut is expected by Bloomberg Economics in June. By the end of the year, it could be reduced to 13%.