Economic Authorities Are Not Afraid of Recession, But There’s Another Danger – Stagnation

July 19, 2013
(Фотография: iStockPhoto)

Since the beginning of the year the growth of industrial production and the Russian economy as a whole has almost stopped. However Alexei Ulyukaev, the new chief of the Ministry of Economic Development, is confident that it will not result in a recession. Officials and a number of independent experts expect a recovery in growth in the second half of the year, pointing to a long list of favorable factors. But analysts from the Higher School of Economics (HSE) believe that the real danger is not recession, but rather stagnation.

Speaking to reporters on Tuesday, Alexei Ulyukaev reassured then that in the second half of the year the Russian economy will not face recession.

Those speculations about a recession in 2013 were triggered by the statistics from the first months of the year. According to the Rosstat (Federal Statistical Service), the GDP in the first quarter of 2013 grew by only 1.6% (relative to the first quarter of 2012).

According to the Ministry of Economic Development (MED), from January to May the GDP grew by 1.8%, compared to 4.5% a year earlier. Industrial output fluctuates from month to month, rising and falling. In general, for the first half of 2013, industrial production grew by 0.1% compared to the same period in 2012 (in the first half of 2012 there was an increase of 3.1%).

However, the MED officials believe that the state statistics agency is too conservative in its industrial output growth estimates. “The preliminary results for June are quite positive. We have what the Rosstat predicted, and we will come up with our estimates that take into account seasonal and calendar factors. Our preliminary estimates are higher than those by the Rosstat, Andrey Klepach, Ulyukaev’s Deputy said. “There was a strong spike in June, that makes up for the dip in May.”

But what is needed to reach the targets set by the Ministry – a 2% growth of industrial production and a 2.4% GDP recovery in 2013 – is not just a one month “positive jump,” but a reversal of the whole recession trend.

The international organizations forecasts are usually slightly less optimistic than official estimates. The International Monetary Fund predicts a GDP growth of 2.5%, the World Bank thinks it will grow by 2.3%, the Fitch rating agency’s estimate is 2.2%, and the European Bank for Reconstruction and Development promises a 1.8% growth.

Obviously, to get to these annual figures, the GDP growth has to substantially accelerate in the second semester.

“My forecast adjusted by the rate of GDP growth for the current year is 2.6%. In this case, the average growth in the third and fourth quarters should not drop below 2.9%, calculates Dmitry Harlampiev, Head of Macroeconomic Analysis Department of “Petrocommerce” bank. “I estimate the recession probability in the Russian economy during the year at no higher than 30%. Ulyukaev also hopes for better performance. “I think chances are that over the next six months we’ll see some upturn,” he told Interfax. “I think the growth in the second semester will be higher than in the first.”

According to officials and a number of analysts, a number of factors will contribute to the recovery.

First, significant improvements in certain sectors are expected compared to 2012. “We expect some positive momentum in the second half of the year. In particular in agriculture and food processing where the last year was a disaster. We should see some positive trend,” Klepach said on Friday, July 12, on the sidelines of the “Innoprom-2013” exhibition, according to RIA Novosti. Indeed, according to the Ministry of Agriculture, grain yields are 27% above the results for last year.

Second, inflation, which in annual terms was 6.9% in the second half of the year, will be lower, to which higher yields will also contribute. “I think inflation will be less than 6%, unless there are food price shocks,” said Klepach. The central bank has similar expectations.

Third, as expected by most experts, the Bank of Russia will resort to easing monetary policy in order to stimulate the economy through cheaper loans. “It is possible that towards the end of the period we’ll see an impact of the quantitative easing of monetary policy, announced at the last meeting of the “CB,” hopes Harlampiev. The Bank started to come up with new arrangements to supply commercial banks with liquidity, such as refinancing secured by non-marketable assets with variable interest rates. Ulyukayev, himself a former first deputy chairman of the Central Bank, praised the ingenuity of its new Chair, Elvira Nabiullina. “I think this is by all means the right decision,” he said. “This is a mitigation option, which, in my opinion, is more productive than simply easing policy by cutting interest rates.” However, analysts expect that this fall the Central Bank will also start cutting the rates.

Fourth, according to German Gref, the Sberbank Chairman, in terms of the macroeconomic situation Russia is among the world’s leaders, which makes the country quite stable financially. “Our national debt is below 10% of GDP, while in a number of European countries it exceeds 100%,” said Gref. “Therefore, a probability of default is close to zero.” The national currency will also remain stable. “The Central Bank foreign exchange reserves of more than half a trillion dollars will be enough to counter any speculative attacks, should they occur,” said Gref. “There are reasons to expect a slowdown in capital outflows and more investment in fixed assets,” believes Harlampiev. The rouble appears to be somewhat undervalued, so based on the expected capital account deficit reduction, the target exchange rate corridor by the end of the year should be around 31.0-31.5 roubles per US dollar, the analyst predicts.

Fifth, fiscal policies should also be more accommodating. “The first half of the year was very weak in part because of a tight fiscal policy. While in the first half of 2012, budget expenditures grew by almost 30%, during the first half of this year they did not rise at all,” adds Natalia Orlova, the Chief Economist at Alfa Bank. “For this reason, we can expect higher rates of spending in the coming months, which should contribute to the GDP growth.”

“We expect that in the second half of the year the situation will gradually improve as inflation slows down and interest rates can be lowered,” argued Evgeni Gavrilenkov, Anton Stroutchenevski, and Sergey Konygin, analysts from Sberbank Investment. “In addition, more positive dynamics of the agricultural sector should contribute to growth in the food industry and in the agricultural machinery manufacturing. In general, we expect that by the end of the year industrial production will grow by about 2%. But with the global economic upturn and consistently high oil prices in 2014, the GDP can grow by as much as 3%,” says Harlampiev.

However, not all experts are equally optimistic. Some exogenous factors may come into play, in particular related to China. “The Chinese economy is experiencing some difficulties. Growth is slowing down, the situation in the financial sector is difficult,” says Gref. “If the Chinese economy growth continues to decline rapidly, the growth rate of the Russian economy in 2013 may be lower than 2.2%, that we use as a benchmark,” warns Orlova.

But the biggest problem for the Russian economy would be getting stuck in a state of stagnation, if none of the above factors work.

It is important that the stagnation involves some form of preservation of the economic structure, its rigidity and resistance to innovation. According to yet another bulletin, “New KGB,” prepared by the HSE Development Center, over the coming month the Russian economy will continue to stagnate. Moreover, the economy may become even more stagnant.

The HSE experts believe that the existence in a stagnation mode will not be limited to a gradual decay of all processes. The imbalances will be amplified, and new sources of instability will emerge, “i.e. resulting from inconsistent government policies.”

And the longer this situation exists, the more difficult it will be to get the economy back on a growth path, because inertia becomes a more powerful factor.

At the end of the second quarter of 2013 a reduction of the trade surplus continuously large capital outflows led to a deterioration of the balance of payments, which, in turn, made the rouble weaker. However the experts don’t think that this depreciation will significantly alter the trajectory of imports, but it will push up import prices. Driven by this, as well as by higher tariffs for services provided by natural monopolies, inflation will grow.

Another source of imbalance is wage increases against the background of lower productivity in the economy.