British Embassy Moscow
The Russian economy slows to just 1.2%. Some commentators say that Russia is, technically, in recession. But the central bank once again decided not to cut interest rates.
Russia’s economy grew by rates of 3-4% between 2010-12, and by around 7-9% in the decade before the global economic crisis. But the economy has slowed sharply since the middle of 2012.
The Russian Statistical Service published its preliminary estimate of second quarter GDP on 9 August. GDP growth dropped to 1.2% in the year to Q2: much weaker than expected. The figure compares with 1.6% growth in the year to Q1 and was the 6th successive quarter of declining annual growth.
Although quarterly data are not yet available, some commentators have inferred from the latest statistics that the economy actually shrank in both the first and second quarters of 2013, thus fulfilling the classical definition of a recession.
The slowdown has been broadly based, across consumption, government spending, investment and exports. The lacklustre tone of the world economy is partly to blame, though Russia has been lucky that the price of oil – a mainstay of its economy — has so far held up quite well. The slowdown principally reflects domestic capacity constraints and long-standing structural barriers to growth.
Most commentators continue to predict that the economy will pick up somewhat in the second half of the year, not least because the agricultural harvest looks likely to return to normal levels after last year’s drought. But the economy may struggle to record 2.5% growth in 2013 as a whole, and the medium-term outlook will remain below Russia’s potential in the absence of far-reaching (and politically difficult) structural reforms.
Meanwhile, the central bank’s monetary policy committee, meeting on 9 August for only the second time under new Governor Nabiullina’s tenure, surprised the markets by once again deciding to hold official interest rates unchanged at 8.25%, while albeit giving a signal that monetary policy would be loosened as inflation declines in the months ahead. Headline inflation has fallen from its peak of 7.4% in May to 6.5% in July, but is still above its 5-6% target range. Although it looks set to fall further in the coming months – thanks in part to favourable food price trends –“core” inflation is not coming down nearly as fast. Nabiullina, who was previously President Putin’s senior economic aide, is turning out to be a stronger force for monetary discipline than some imagined.
The sober domestic economic news is likely to lead to further pressure for a more overt fiscal and monetary stimulus, and will add piquancy and impetus to Russia’s efforts to craft a compelling declaration on Growth, Jobs and Investment for G20 leaders to endorse at their Summit in St Petersburg in early September.
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