President Putin has one of his regular meetings with the members of his government in his office in the Kremlin on 11th September 2017. During that meeting he received a detailed report on the state of the economy from Economics Minister Maxim Oreshkin.
Briefly, Oreshkin reported that against a background of lower than expected inflation (currently running at an annual rate of just over 3.1%, well below the Central Bank’s 4% target) investment and lending activity are increasing, setting the scene for higher growth both this year and in the years are coming.
Oreshkin’s report to Putin, delivered verbally with a transcript published by the Kremlin’s website, is provided below
Actually, we had several not very good years economically, which explains a somewhat pessimistic view of our economy. At the beginning of the year, experts did not expect GDP to grow by more than 1 percent. We can say with confidence now that these pessimistic forecasts have not materialised. We [at the Ministry] believed early this year that the economy would grow by over 2 percent and that inflation would fall below the 4 percent target. The current dynamics show that our assessments were a bit pessimistic as well.
Economic growth accelerated in the second quarter to 2.5 percent, while inflation was 3.2 percent at the beginning of last week.
Investment activity was even higher than we expected: according to available data, it reached 6.3 percent at the end of the second quarter. It is very positive news, because investment projects that are implemented today will boost economic growth tomorrow.
Following a minor technical slowdown in July, we expect a new wave of positive news and accelerated economic growth in the next few months.
What is the reason for this? First and foremost, we are entering a long cycle of lending activity in the banking sector. Inflation has stabilised at a low level, and the debt burden on people and companies has decreased over the past few years. Taken together, this created the grounds for a lending cycle that will last many years. When the inflation rate went down to 3.2 percent, it was a signal for the Bank of Russia to reduce interest rates. The goal is, as you know, to maintain inflation at around 4 percent. The Bank of Russia has announced its plans to reduce the interest rate at its meeting on Friday.
If we look at what happened within the banking system over a period of the past month, we will see that our largest banks dramatically reduced mortgage rates. They have cut the basic rate to less than 10 percent, which has increased housing affordability in Russian cities to the highest level so far. In this situation, we expect a record high volume of mortgage contracts this autumn and winter. This will bolster the construction industry and the production of construction materials in the sectors that have idling capacities.
Retail lending is gathering momentum. The important feature that distinguishes the current cycle from the previous one is that our banks are focusing on low-risk lending products, for example, those that are connected to payroll programmes. Therefore, we can expect sustainable dynamics here too.
And lastly, corporate lending. Dynamics in this sector have reached positive figures as well, which is propping up the investment activity.
Secondly, we expect the consumer demand to resurge. In addition to the reviving lending activity, which I have mentioned, salaries have started growing as well. This year alone, real wages can grow by over 3 percent, and next year we expect them to grow by some 4 percent, including due to rising wages in the public sector.
Of course, we will need several years to make up for people’s losses in 2014 and 2015, but the crucial thing is that this nascent income growth is not based on oil prices but on the active growth of labour efficiency. We expect it to grow 2 percent; last year we only reported a symbolic growth of 0.1 percent.
Considering the record low unemployment level, which we expect to drop to 4.7 percent in three years, as well as the unfavourable demography, the growth of labour efficiency will be our key to maintaining economic growth and individual incomes.
The third target is the further growth of investment activity. In this context, we must continue working to make conditions for Russian business more predictable. We are moving towards this goal thanks to changes in the macroeconomic policy, which we introduced in the past few years. These include inflation targeting by the Bank of Russia, which has helped us reduce inflation to a record low, a responsible budget policy and the introduction of a new mechanism for moderating the influence of oil prices on the national economy.
It is important that predictability is also growing at the micro level. We have launched a reform of the regulatory system, which is becoming more predictable and, most importantly, is focused on prevention rather than penalty.
Mr President, the decisions you made public at a recent meeting at the Nizhne-Bureiskaya HPP are a major element for reducing administrative pressure.
Another major component of predictability is tariff regulation. This year we continued our indexation policy that includes adjusting prices to inflation targeting. We will soon prepare proposals for transitioning to long-term price formation, so that infrastructure companies and business in general will know that prices will not change for a maximally long period of time. This issue was also discussed at a meeting in Vladivostok.
An important task in the context of the economic policy is active support of tools for investment financing. We have support programmes that are actively developing, primarily investment lending programmes. The programme Six and a Half is in effect for small and medium-sized businesses. Work is underway to launch the “factory of project financing,” which will support projects worth three billion rubles and up.
I would like to particularly thank the Bank of Russia, which has actively supported this programme’s development. Lower reserve and capital requirements will be applied to banks for the loans issued under this programme. The first loans are expected to be granted in the first quarter of 2018.
It is very important that we have organised the work under both programmes in such a way that allows for adopting a decision on granting a loan without any officials involved.
Of course, an important element for the growth of investment activity is a programme for infrastructure mortgages. I will brief you on its preparation soon. As a result of these programmes and their outcome, we expect active investment growth at 5–6 percent per year during the forecasted period.
It is clear that economic growth largely depends on the Government’s priority projects. As regards the maximum effect on GDP growth, I would like to note a project for creating conditions for active growth of non-resource exports, as well as a recently approved project for increasing labour efficiency. Under the latter, we aim for active cooperation with our Japanese partners, with a corresponding agreement signed at the Eastern Economic Forum.
Due to the 2.1 percent GDP increase this year, in the next three years we expect sustainable growth of the national economy of at least two percent, a stable inflation rate at four percent, and household income recovery. During this three-year period, real wages should increase by about 10 percent.
An increase in wages is extremely important because it allows us to attract and retain the best talent in the country. In today’s global economy, victory in competition goes to those who can, on the one hand, help their people fulfil their potential, and on the other hand, be the most attractive place to live and work to attract the best talent.
There is still a difference between the basic and the desired scenario. The basic forecast gives us 2.3-percent economic growth while the desired growth is 3.1 percent. Therefore, the Government continues to develop and gradually implement more changes to promote economic growth at a rate higher than the global average. First, in addition to the programmes mentioned here today, I am talking about the digital economy programme, increasing the competitiveness of Russian cities and a number of other projects. I also want to note that the basic scenario so far includes the conservative effect of the measures that were implemented only recently.
This concludes my report.
As is clear from Oreshkin’s report – and as has indeed been repeatedly said by Russian officials from Putin down – the Russian economy is in a period of transition, moving from the high inflation high wage growth environment which characterised the post 1990s recovery period up to 2012, to a low inflation high investment environment, which is expected to power Russian economic growth after 2020. In keeping with previous forecasts, Oreshkin anticipates that Russia will have completed this transition within three years ie. by 2020. Though his report wisely says nothing about what he expects to happen after 2020, it is quite clear that he expects the economy’s growth rate after 2020 to increase.
Note that Oreshkin anticipates active investment growth of 5-6% per year during the three year period leading up to 2020, as against real wage growth of just 10% over the whole of this three year period.
In other words Oreshkin expects investment to grow faster than wages, increasing the economy’s productivity and competitiveness, though as Russia shifts towards a pre-election period he is careful not to say this.