Russia Feels Economic Growth Limits Again

 Russia Feels Economic Growth Limits Again

An acceleration in economic growth that followed Russia’s worst recession this century probably ended after three quarters despite a bull-market rally in oil, its chief export. Bloomberg reports in its article Russia Feels Economic Growth Limits Again After Short-Lived Acceleration that after getting a short-lived boost from inventory restocking, the economy of the world’s biggest energy exporter added an annual 2 percent in the third quarter, down from 2.5 percent in the previous three months, according to the median of 18 forecasts in a Bloomberg survey. The Economy Ministry estimates output increased 2.2 percent in the period, putting it close to the central bank’s view. 

Despite a government vision of an economy remade by the crash in energy prices and a currency crisis that followed, Russia is increasingly resembling its old self as consumer demand comes to the fore. Expansion is falling back to the limit of what the central bank believes the economy can accomplish, with gains in GDP forecast to lose more momentum and slow slightly every quarter next year. “The surprisingly strong second quarter was driven in part by one-off effects,” said Liza Ermolenko, an economist at Barclays Capital in London. “Consumption appears to have taken over as the key driver of growth.” Although slow to recover after incomes collapsed, household spending jumped 4.3 percent in the second quarter from a year earlier, still lagging behind a 6.3 percent increase in investment. But consumer confidence is now improving thanks to more than a year of gains in real wages, a stronger ruble and an unprecedented decline in inflation. Retail sales are on the rise after a record contraction of 27 months ended last April.

Bank of Russia Governor Elvira Nabiullina has warned that, without overhauling the economy, not even oil at $100 a barrel would lift medium-term gains in GDP beyond a range of 1.5 percent to 2 percent. Global benchmark Brent crude surged 20 percent in the third quarter, a run that’s continued and pushed it over $60 last month.

Policy, Demographics

Considering Russia’s “conservative” monetary and fiscal policy, and its demographic struggles, the recent pace of expansion in the economy isn’t “very low,” said Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow. A decline in the working-age population by 1 percent every year is possibly shaving 1 percent off economic growth, according to Kouzmin. “Risks for growth are very moderate,” he said. “There’s indeed some slowdown in annual growth rates, but that’s mostly related to base effects.”

President Vladimir Putin is growing impatient as he approaches what may be his final term in the Kremlin. In an unusual remark on monetary policy last week, he said Russia’s strong economic fundamentals, including inflation at a record low, warrant further cuts in interest rates. The central bank has been stingy with policy easing, cautioning that its sway over economic growth is limited as it focuses on keeping inflation in check. Still, it’s delivered five rate cuts so far this year and said in October for the first time that it’s preparing to abandon its “moderately tight” stance in favor of neutral monetary policy.

The head of the Bank of Russia’s monetary-policy department, Igor Dmitriev, has signaled rate setters may begin to look beyond price growth in charting the way forward. “Experience is leading us to flexible inflation targeting,” Dmitriev, who reports directly to Nabiullina, said at a round-table in Moscow last Thursday. “The widest possible spectrum of indicators deserves a look in making decisions. That includes economic growth and the situation in the labor market.”

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