| Increased government activity in the economy led to a slowdown in its growth Yesterday, Minister of Economic Development German Gref told Vladimir Putin about the situation in the Russian economy. Traditionally, he reported on the growth rates of GDP, industrial production, trade volumes, inflation rates, etc. In his report, the minister several times used the adjective “advanced” in relation to the growth of a number of macroeconomic indicators, which, apparently, should have given the president a positive image of the current economic situation. However, an analysis of the document prepared by officials of the Ministry of Economic Development based on the results of ten months (on the basis of this document Mr. Gref reported to the President) not only does not allow one to look into the future of the Russian economy with optimism, but, on the contrary, causes concern.
In particular, because GDP growth rates are declining. Moreover, this trend, according to the Ministry of Economic Development, has become stable. In October, GDP grew by only 0.3%, while in the third quarter the average monthly growth rate was 0.5%, and in the second quarter - 0.8%. In general, in January-October, economic growth compared to the corresponding period last year is estimated at 5.9%. The final figure is expected to be similar - 5.9-6%. Let us recall that last year the Russian economy grew by 7.2%. “The slowdown in economic growth is mainly due to a sharp drop in export growth coupled with weakening growth in domestic investment demand. To the greatest extent, the tendency to slow down growth was manifested in a slowdown in the rate of industrial development,” states the Ministry of Economic Development and Trade.
Indeed, exports during the reporting period in physical terms decreased threefold, due to a reduction in oil exports (at record high prices for this main Russian export product). At the same time, imports of goods, spurred by an increase in the real exchange rate of the ruble in the context of intensive growth in incomes of enterprises and households, increased by more than 22%, and import prices (in dollar terms) jumped by 5.9%.
With investments, as well as with exports, not everything is in order either. Capital investments in January-October 2005 increased by only 9.9% compared to 11% in the ten months of last year. According to the Ministry of Economic Development, in October investment growth decreased to 0.8% compared to 1% on average per month in the third and 1.7% in the second quarter. Against the backdrop of a decline in overall foreign investment, foreign direct investment increased by about 18%, but its volume ($6.6 billion) “remains at a low level,” ministry officials regret, concluding: “Overall, the confidence of domestic and foreign investors the investment and business climate is recovering slowly.”
A bright spot can be called progress in the structure of investment, which is currently characterized by a noticeable increase in investment in manufacturing (by about 17%) with a much more modest dynamics of investment in the extractive industries. True, oil workers hardly need to complain. “After a deep recession last year, this year there has been an increase in investment in oil production (in nine months, according to the Ministry of Energy, by 17.8%),” says the report of German Gref’s department.
Another sad fact is the continuing downward trend in the growth rate of industrial production. “With the exception of seasonal and calendar factors, industrial production increased in October by 0.2% against 0.6% on average per month in the second and 0.7% in the third quarter,” write MEDT officials. In general, over ten months, industrial production increased by only 3.9% against the seemingly fantastic 7.1% for January-October 2004. “Import competition is crowding out domestic producers,” ministerial analysts say.
But in Russia the growth rate of household incomes is steadily growing, which, coupled with the intensive expansion of consumer credit, has provoked a real consumer boom. In January-October 2005, retail trade turnover increased by 11.8% compared to the corresponding period last year, and the volume of paid services to the population increased by 6.9%. Paradoxically, there is nothing particularly to be happy about here. An increase in income, and therefore demand, in the absence of an adequate supply of goods (even growing imports do not help) accelerates inflation. Over the ten months and 21 days of October, consumer prices have already increased by 9.9%, while the government set the bar for this year at 8.5%. Yesterday, Mr. Gref told the president for the first time that inflation could reach 11.5% by the end of the year.
Among other reasons for high inflation, the Ministry of Economic Development and Trade names a sharp increase in tariffs for housing and communal services at the beginning of the year, rising costs in the production of food products, heat, as well as in urban transport due to high prices for fuels and lubricants. At the same time, prices for industrial goods producers increased by 16.8% over ten months, which creates significant pressure on the prices of consumer goods and services, MEDT officials write.
Anton Struchenevsky, an economist at Troika Dialog, began to worry about the downward trend in key macroeconomic indicators a year ago, since a slowdown in GDP growth rates had been observed since the second half of 2004. True, this year, according to him, the government made amendments to relations with business, which became “much softer,” but the growth rate is still “much lower than potentially possible.” In the economist’s opinion, today the most important factor for the development of the Russian economy is the state of the investment climate.
“The development took place during that period (1999-2003) when the government, under conditions of budgetary constraints, was balancing the budget and trying to solve the problem of 2003 (payment of external debt. - Ed. ). At the same time, a reduction in the state’s participation in the economy and the tax burden was declared,” recalls Mr. Struchenevsky. When oil prices went up, the situation changed dramatically. “It’s sad, but high oil prices are corrupting our officials. Budget restrictions have practically disappeared, the quality of government policy is sharply declining,” he states. This is expressed, in particular, in the expansion of state participation in the economy, which frightens investors. “It turns out that the invisible hand of the market, no matter how naive it sounds, led to apparent success during 1999-2003, and the visible hand of the state acts so clumsily that it does not allow the economy to grow and realize its potential,” said Mr. n Struchenevsky “Vremya Novostei”.
In turn, the head of the Economic Expert Group, Yevsey Gurvich, called the situation in the economy “very unfavorable.” According to him, in the second half of the year all key indicators deteriorated significantly compared to the first half of the year. He also believes that in the current environment, further growth will be determined by how much investment increases. “And their growth is greatly slowing down. Therefore, a rather pessimistic picture is emerging about next year,” the expert told Vremya Novostei.
At the same time, Mr. Gurvich notes the growth of foreign direct investment against the backdrop of falling domestic growth rates. “Apparently, there are still big political risks,” he says. He explains the growth of foreign direct investment by “targeted” agreements of foreign investors. “But still, they (foreign direct investments. - Ed. ) determine little of the overall picture,” points out the head of the Economic Expert Group.
As Mr. Gurvich said, “nobody believes” in the official inflation forecast for next year (8.5%). “The consensus forecast predicts 10%. I think this is a realistic assessment,” he says. Meanwhile, Anton Struchenevsky is more “merciless” towards government forecasters. “An increase in government spending by 22% in nominal terms will, of course, accelerate inflation much higher. We expect approximately 10.5%,” he told Vremya Novostei. Mikhail VOROBYEV |
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