The growth of the Russian economy and industry is slowing down, but inflation is not. Both the August data on industry and key economic sectors, as well as market indicators, show a slowdown. The growth rate of output in core economic activities slowed to 1.7% year-on-year, down from 4.1% in July. Business surveys by the Central Bank and S&P Global report worsening assessments of current business conditions, dropping below the 50-point benchmark. Early signs of slowing private consumption are emerging, though it is lagging behind the slowdown in industry.
Meanwhile, inflation is not only remaining high but also showing signs of acceleration. In the coming months, a number of factors will put additional pressure on prices: the increase in the recycling fee for foreign cars, a sudden rise in government spending, and the weakening ruble. In July-August 2023, when the Central Bank began raising the refinancing rate, the annual inflation rate was below 5%, but now it exceeds 9%. While in the first half of the year, inflation and economic growth moved in tandem, these curves are now increasingly diverging.
Stagflation, i.e. stagnation amid high inflation, now seems the most likely scenario for the Russian economy. Spending and demand in the investment and military-industrial sectors continue to grow, but civilian industries are unable to meet the rising parallel demand from the private sector. Re:Russia warned as early as last year that the contradictory economic policies of Russian authorities, who are simultaneously increasing spending and demand in the investment and military-industrial sectors while tightening commercial credit, are leading to this scenario.
In the second quarter of 2024, Russia's GDP grew by 4.1% compared to the second quarter of 2023. In the previous four quarters, the average growth rate, according to Rosstat, was 5.3%. This is partly due to a base effect: since the second quarter of 2023, the economy has been in a phase of rapid recovery. However, this base effect is now being compounded by the beginning of an economic slowdown.
In August, according to the Ministry of Economic Development, the growth rate of Russia's GDP slowed to 2.4% year-on-year, down from 3.5% in July. While this is an indicative figure, on a monthly basis, the economic trend is more accurately reflected by output in core economic activities. According to Rosstat, the growth rate of this output slowed to 1.7% in August year-on-year, compared to 4.1% in July. The Ministry of Economic Development attributes this sharp slowdown to a 'shift in the harvest season'. However, this is only a partial explanation.
The slowdown in economic growth is also indicated by data from the Central Bank's regular monitoring of financial flows: growth in receipts in the third quarter averaged 0.4%, down from 7.4% in the second quarter. In September, the volume of incoming payments processed through the Central Bank's payment system decreased by 0.2% compared to the average level of the second quarter of 2024. By industry, consumer demand sectors continue to make a positive contribution (though less than in the second quarter), while sectors related to investment and external demand contribute negatively.
Industrial production growth (a narrower indicator than output in core economic activities) slowed to 2.7% year-on-year in August, down from 3.3% in July. Compared to the previous month, output increased by 0.7%, but this is not a return to growth. Commenting on the August data, experts from the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) use the term ‘stabilisation’, meaning that the slowdown in output observed over the past two months has paused.
In fact, experts had expected a slowdown in both industry and the economy as a whole from the second half of 2023, after the Central Bank sharply raised the refinancing rate. However, instead of a slowdown, the economy accelerated sharply. This acceleration was driven by growth in both investment sectors and the military-industrial complex, as well as by an uptick in output in the civilian economy. According to calculations by experts from HSE University (Vladimir Bessonov's group), which exclude data from defence-related industries, fluctuations in output during the second half of 2023 were within the range of 102-103 points, and in the first half of 2024, within the range of 103-104 points. However, the August figure returned to the previous year's range, indicating that the slowdown is happening in both the military and civilian sectors. It’s worth noting that a similar slowdown in military and investment production was observed in the second half of last year.
The experts at CMASF cite five key factors that have made the industrial slowdown inevitable: the weakening of the fiscal spending impulse, the exhaustion of the potential for 'easy import substitution' (which didn’t involve launching new projects), labour shortages, tightening of monetary policy, and increased sanctions pressure.
Indicators of economic conditions also point to a slowdown. The S&P Global Manufacturing PMI in September fell into contraction territory for the first time since April 2022, dropping to 49.5 points (from 52.1 in August). A PMI value below 50 points indicates that the share of negative assessments of economic activity outweighs the positive ones. Production volumes, new orders, and employment all declined, according to S&P Global analysts. Along with weak demand, delays in supplies and material shortages also impacted production volumes. Issues have arisen with both importing goods and transporting cargo via railways. Russian Railways (RZD) is facing a shortage of locomotives, as sanctions complicate the production and repair of equipment (→ Re:Russia: Oil Alone). Confidence in forecasts for the coming year fell to a 19-month low. The set of 'negative' factors mentioned in the surveys largely corresponds to the slowdown factors identified by CMASF.
The Central Bank's monitoring of enterprises, including September estimates, has not yet been published. In August, the composite business climate indicator, based on the Central Bank's enterprise survey, stood at 5.7 points, down from 6.8 in the previous month. However, the indicator’s relative 'health' is misleading, as it reflects the persistent and traditional optimism of businesses regarding the future. More important is the fact that, for the first time since February 2023, the assessments of current business conditions dropped into negative territory (–1.6). The construction sector saw the most significant deterioration in recent months: large enterprises reported –13.75, medium enterprises –9.17. Trade and logistics also slipped slightly into the negative. Additionally, small and medium-sized manufacturing enterprises entered negative territory. Large enterprises remain slightly positive, though their outlook has also worsened. Only large and medium-sized service sector enterprises are showing improved assessments, while small and micro-enterprises remain negative.
Consumer demand, though still overheated, is also showing signs of slowing. According to Rosstat, retail turnover growth slowed to 5.1% year-on-year in August, down from 6.2% in July. The slowdown is more noticeable in non-food trade, affected by rising consumer loan interest rates. The growth of paid services also decelerated in August, dropping from 3.6% to 2% year-on-year.
At the same time, inflation is not only remaining high but also showing signs of acceleration. For the week from September 24 to 30, Rosstat data showed that price growth accelerated to 0.19%, up from 0.06% the previous week and 0.1% two weeks earlier. Annual inflation in August was 9.05%, slightly down from 9.13% in July. This trend suggests an annual inflation rate of 8.6%, while the Central Bank’s forecast was 7.3%. By the end of the year, several factors are expected to exert additional pressure on prices: a 75-80% increase in the recycling fee for foreign cars (effective from 1 October), a sudden rise in government spending by 1.5 trillion rubles (as revealed in the 2025 budget plan), and the emerging weakening of the ruble.
The fact that the key rate hikes, which began in July-August 2023, have not been able to curb inflation is a very troubling sign. In July- August last year, annual inflation was below 5%, but within a year, it has nearly doubled – akin to a fever continuing to rise after taking antipyretics. In the first half of the year, inflation rose alongside economic growth, but now the two curves are diverging. The economy is slowing down, while inflation is not. This indicates that the Russian economy is steadily moving toward stagflation. Stagflation – economic stagnation amid high inflation – first emerged in the U.S. and other Western countries in the mid-1970s, and again in the 1980s. In the first case, it was linked to a sharp rise in oil prices; in the second, to an excess supply of money that did not lead to output growth. In Russia, the threat of stagflation is tied to increasing military spending, while the refinancing rate suppresses output in civilian sectors.
The term 'stagflation' is increasingly being mentioned in speeches by Central Bank leaders. In August, the Bank's Deputy Chairman, Alexey Zabotkin, in a keynote interview with 'Rossiyskaya Gazeta', once again noted that 'this very misconception – that higher inflation can be traded for additional economic growth – was the cause of stagflation in the U.S. and Europe in the 1970s'. Zabotkin also recalled that in the early 1980s, to tame inflation, U.S. financial authorities had to raise the key rate to 20%, going through two recessions in three years. When he made this statement, the Central Bank's key rate was already at 18%. Since then, it has been raised to 19%. Zabotkin recently told the State Duma that at the next Central Bank Board meeting on 25 October, a further increase to at least 20% is possible.
The report on monetary policy conditions and the transmission mechanism, published by the Central Bank on 9 October, conveys the same message. It notes that the previous rate hike had only a 'limited impact' on the market. Currently, the market is expecting an increase to 20%, but more drastic decisions are not ruled out. For example, analysts at Sovcombank are confident that the rate will be raised to 22% over the next three meetings. The only question they have is whether the October hike will be to 20% or immediately to 21%.
However, it is still too early to definitively declare a shift to stagflation, according to Anton Tabakh, chief economist at the rating agency Expert RA. He suggests that inflation assessments should focus on seasonally adjusted monthly inflation rates, which have not yet shown significant growth, rather than weekly figures. In his view, stagflation can only be confirmed if the decline in economic activity persists and high inflation remains for at least a quarter. While this is true from a formal standpoint, factors that could prevent such a scenario are currently not visible. The budget for the coming year foresees further increases in military spending, which will sustain high demand from both the state and the population, but the civilian sectors will be unable to meet this demand.
The slowdown in growth in recent months is due to the gradual fading of the low base effect from last year, according to analysts at Raiffeisenbank, who estimate that GDP growth next year could be between 1% and 1.5% if current trends persist. Analysts at the Bank of Finland’s Institute for Emerging Economies (BOFIT) expect even weaker growth – up to 1% in both 2025 and 2026. The August consensus forecast from the Higher School of Economics (HSE) Development Centre projects growth rates of 1.6% for 2025 and 1.5% for 2026. In its ‘Basic Guidelines of Monetary Policy’ report, the Central Bank, in its baseline macroeconomic scenario, forecasts growth in the range of 0.5-1.5%. The government, however, is much more optimistic, having budgeted for 2.5% growth (→ Re:Russia: The Non-Victory Budget), while the Central Bank only expects such growth in an alternative, inflationary scenario. Zabotkin’s warning refers precisely to this scenario, suggesting that the inflationary factors embedded in the budget will take effect, and growth will be significantly lower. This would result in a stagflation scenario. Re: Russia warned a year ago that the contradictory policies of the Russian authorities – inflating budget spending while 'tightening' commercial credit – are leading exactly to this outcome (→ Re:Russia: Heated Stagflation).