Expectations Oscilloscope: business climate index fluctuates along with shifts in business sentiment amid stagnation, low demand, and deteriorating lending conditions

In November, the Central Bank of Russia recorded a slight improvement in the business climate after its frontal reversal in October, when Russian business sentiment went back to the crisis. Over the past month, the business climate index has returned to the positive zone and amounted to 0.9 points after falling to -1.2 in October. Improved short-term business expectations contributed the most to the indicator's rise, while assessments of the current situation did not improve much and remained deep in the negative zone. The growing optimism was facilitated by enterprises' adaptation to the realities of mobilisation and the end of its active phase. The negative dynamics in the mining and manufacturing industries persist due to the export restrictions caused by the sanctions. Seasonally adjusted output dynamics calculations show that the production has been stagnating in recent months, after falling by 4.5% from the peaks of late 2021. The recorded fluctuations of the business climate index in the Central Bank's measurements mainly reflect shifts in business sentiment amid this stagnation, strategic uncertainty, fluctuations in consumer demand, and news shocks.

Although the Russian Central Bank's composite business climate index showed a slight increase and returned to the positive zone in November, this happened mainly because of an improvement in enterprises' expectations. At the same time, assessments of the current situation remain deep in the red (-6.8 points), demonstrating very modest growth compared to the previous month (-7.2). In our previous analysis of the Central Bank's survey, conducted in the first half of October, we wrote about a trend's frontal reversal: after five months of continuous improvement, assessments of enterprises have sharply deteriorated in all areas and returned to the negative zone again. This happened due to a worsening of current assessments as well as expectations. In the latest survey (conducted in the first half of November) estimates of current production have improved by 0.3 points, while expectations grew by 3.3 points. Therefore, we can say that the improvement of the integrated business activity index came as a result of an increased margin between current estimates and expectations (last month it ranged from 12.9 points to 15.9 points this month). Estimates of the current output level are back to their July-August figures.

Central Bank of Russia Business Climate Indicator, 2022

Expectations have improved the most noticeably in retail trade and services; here the uncertainty shock caused by the mobilisation has receded. The negative dynamics remained in the mining and manufacturing industries, especially in the production of intermediate goods (metals, timber, paper, coke, and oil products), which is associated with the impact of export restrictions under the sanctions, as the Central Bank analysts wrote in the monitoring commentary.

Demand from most businesses was slightly higher than a month ago but is still at a low level, which is comparable with the period of the second wave of the COVID-19 pandemic in August-September 2020. Because of the sharp drop in demand for new apartments, caused by the decline in real incomes of the population and the tightening of mortgage conditions, construction companies will face a protracted crisis. Demand for agricultural products also remains low. This year's record harvest is difficult to sell on international markets because of Western sanctions and a strong ruble. The energy complex, amid gloomy expectations associated with an enforced embargo on Russian oil, was supported by the cold weather.

The growth of selling prices accelerated in November after a six-month slowdown in all sectors except agriculture. Price expectations of enterprises from almost all industries are also rising. The only exception was the motor vehicles trade, which cannot recover from the sharp drop in demand after the announced mobilisation. Price expectations reached historic highs among electricity and water supply companies ahead of the December 1st increase in utility rates. The rather frontal expectation of price growth against the backdrop of stagnant output and low demand is an alarming sign of probable stagflation.

Lending conditions assessments have worsened, partly because the Central Bank has stopped cutting its key rate. Commercial banks have also stopped cutting interest rates and raised the level of non-price requirements for corporate borrowers, especially in terms of collateral. The Central Bank attributes the deteriorating lending dynamics to the continuing high uncertainty in the economy and says that some companies began to refuse to lend on previously approved applications in order not to increase the debt burden. The government's subsidization of the interest rate on some types of soft loans remains the only factor that supports the lending market. Yet even here there were cases when the actual rates were significantly higher than the announced ones.

The seasonally adjusted calculations of the Higher School of Economics' output dynamics indicate that the production has been stagnating in recent months, after falling by 4.5% from the peaks of late 2021. Meanwhile, the fixed fluctuations of the business climate index in the Russian Central Bank's measurements mainly reflect the fluctuations of business sentiment amid this stagnation, strategic uncertainty, fluctuations in consumer demand, and news shocks.