Rosstat – Russia’s state statistical agency – has now provided official figures confirming what was already known, which is that the Russian economy accelerated markedly in the second quarter, growing at an annual rate of 2.5% in the period April to June as opposed to 0.5% in the period January to March.
In addition the normally highly cautious Central Bank is now expecting either zero inflation or deflation (ie. falling prices) in August.
The latter is more likely as food production in Russia continues to grow, with the harvest now expected to be bigger than earlier estimates and total food production in Russia now expected to exceed last year’s total despite the cold spring and early summer.
Higher food production in the summer months traditionally translates into falling food prices in the summer, pulling overall inflation down, and it now seems all but certain that this will again be the pattern this year.
GDP growth in Russia tends to be higher in the second half of the year than in the first, though this is not a fixed pattern. However with inflation continuing to fall and food production continuing to rise it is likely to be the case this year.
If so the possibility that in raw output terms the Russian economy this year will fully make up all the losses it suffered during the recession can no longer be completely discounted.
Since the recovery is investment and production led – as the Russian authorities have always wanted – it will take a little longer before Russian living standards fully recover to their pre-recession levels, though that too now looks certain to happen much sooner than anyone (including the Russian authorities themselves) expected.
Regardless, the economy should be on a steady rising curve by the time of the Presidential election next year, with the population becoming increasingly conscious of the fact. If one supposes that Russian economic policy like economic policy in the West is driven by political concerns – which for the record I don’t think is the case at all – then the Russian authorities have achieved their objective of creating conditions for economic optimism before the election next year.
The observation that is often made about rising Russian growth rates this year is that at 2-3% growth in Russia remains unspectacular by world standards.
This however overlooks the key point that the priority for the Russian authorities is still not the overall growth rate but establishing a low inflation environment by holding inflation down below an annual rate of 4%.
The result is that Russia now has real interest rates of around 5% in contrast to the Western economies, which are generally growing at slightly below the current quarterly growth rate in Russia, but where real interest rates are either zero or even below zero.
The result is that growth in Russia is taking place against a background of increasing saving – of which there are now the first definite signs – whereas in the West it is happening against a background of rising debt secured against inflating asset prices (mainly land and stocks).
In the US and Britain higher saving usually takes place when companies and especially consumers have to pay down debt, and is generally a cause of recession because it leads to corresponding cuts in investment and demand.
Russia by contrast – through the deliberate actions of its government – is gradually becoming one of those economies – like Germany and the Far Eastern economies – where investment and demand are financed not through debt secured against inflating asset prices but through savings, which are accumulating in what is steadily becoming a low inflation environment. Moreover the high real interest rates, by preventing the price of assets like land and stocks from rising too rapidly, tends to push investment away from those sectors into sectors like manufacturing and farming which the government sees as more productive.
That has historically led in those countries which have followed this model to higher investment in those sectors of the economy – first and foremost manufacturing, but also in Russia’s case farming – which lead to higher output, which is precisely what we see starting to happen in Russia now.