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ECONOMY UPDATE: Russia’s economy grew more in 2017 than previously reported

Revised figures show industrial production growth significantly higher than first reported

Rosstat – Russia’s central statistical agency – has produced revised figures for industrial growth in Russia in 2017 and in the first quarter of 2018.

Such updates of economic data are routine occurrences in statistical surveys of all economies, with figures regularly revised by statistical agencies all around the world as more information from businesses and companies flows in.

There is no reason to doubt the new revised figures, which are undoubtedly more accurate than the previous figures.

Rosstat is now reporting that industrial growth in Russia in 2017 was 2.1% as opposed to the previously reported 1%.  Rosstat is also reporting that industrial production in Russia in the first quarter of 2018 was 2.8% higher than in the previous year, instead of being 1.9% higher as was previously reported.

Moreover industrial production in Russia in the first five months of this year was 3.2% higher than in the previous year, which appears to point to a gradual acceleration of Russia’s industrial growth rate as the economy puts the recession further behind it.

These are much stronger figures than previously reported, and suggest that the GDP figures both for 2017 and for the first five months of 2018 will soon be revised upward, with GDP growth in 2017 possibly being closer to 2% than the 1.5% previously reported.

The GDP contraction in Russia during the recession is now known to have been just 2.2% in 2015 (as against the 3.7% originally reported) and just 0.2% in 2016.

That means that the revisions to the industrial growth figures for 2017 and for the first five months of 2018 point to Russia’s GDP now either having surpassed its pre-recession level or being very close to doing so.

In other words the figures show that Russia’s economy powered through the 2014 oil price collapse and sectoral sanctions with only a small and brief decline, with the trend pointing to a gradual acceleration in largely inflation free growth since then.

I say this because the rises in industrial output in 2017 and in the first five months of 2018 not only appear to show a rising trend, but they are actually surprisingly good, and are a testament to the Russian economy’s extraordinary momentum and resiliency given that real interest rates throughout the recession and post recession periods have never fallen below 5%, with no countervailing fiscal stimulus at a time when the Russian government has instead been pursuing a policy of budget consolidation.

Putting it another way, the economy’s effortless adjustment to the lower oil prices and sanctions which most Western commentators expected would break it shows the immense comparative advantage Russia has achieved by its extremely conservative debt policy.

Where most economies typically tank up with debt in good times, thereby exposing themselves to sometimes serious difficulties when the good times turn bad, Russia stubbornly refuses to do so, and instead chooses to live at all times within its means.

The result is a roughly balanced budget, which is now in surplus, large reserves, growing savings, a trade surplus, a balance of payments surplus, falling inflation, and increasing resiliency in the face of external shocks.

In light of this it is not surprising that the Russian Central Bank is reported to have flatly rejected IMF chief Christine Lagarde’s recent proposal that Russia borrow more from abroad.

On the subject of the Central Bank, it has once again disappointed my hopes by choosing at its most recent meeting four days ago to pass up the opportunity to cut its key rate, which remains at 7.25%.

It has justified this decision by making what on the face of it look to me to be some very strange predictions about the future rate of inflation.

Specifically the Central Bank is now saying that the Russian government’s recently announced plan to increase the rate of VAT in 2019 will add 1% to the annual rate of inflation, and that this VAT increase, though it will not take place until 2019, will nonetheless begin to have on impact on inflation as soon as the third quarter of this year (ie. 2018), with inflation rising to 3% or even 3.5% by the end of this year.

The Central Bank is moreover claiming that because of this VAT increase inflation may go up briefly to 4.5% in 2019, which is above its 4% target.

Maintaining the key rate at its present level is supposedly necessary to cap this expected inflation increase and to ensure that after 2019 inflation falls back again.

No doubt the Central Bank is far better informed about the state of the Russian economy than I am, but on the face of it I find this all rather surprising.

The reality is that the annualised rate of inflation in Russia is currently just 2.4%, which is well below the Central Bank’s 4% target.  Moreover the usual pattern in Russia is for prices to fall during the summer – ie. during the third quarter – when the Central Bank expects them to rise.  As it happens in the week before the Central Bank took its decision the rate of price growth in Russia was actually zero.

I struggle to see how a VAT increase in 2019 can have the sort of impact on prices in 2018 that the Central Bank expects it will, and frankly unless things are in the works which I don’t know about I think it is much more likely on current trends that inflation in 2018 will be below 3% than above it.

As for the effect of the VAT rise in 2019, that unquestionably will cause inflation to go briefly higher.  However it will be a one-off event happening against a falling inflation trend.  I doubt it will have the impact the Central Bank says it will.

The Central Bank has a history of predicting inflation rises which do not happen, and I have to say that its latest inflation projections look to me to be another example of this.  Latest reports say that even Central Bank Chair Elvira Nabiullina is admitting that they are very much on the “conservative side”.  Overall they seem to me to be far too pessimistic.

I suspect that the reality is that the Central Bank is still committed to its 5% real interest rate policy, what it miscalls its “moderately tough monetary policy”, and that its rate cuts earlier this year were undertaken without much real conviction.  Since then it has been hunting around for reasons to delay cutting rates further this year, and it has now found them in next year’s VAT increase.

I suspect that means that we will see no further rate cuts this year unless inflation falls below 2%, which by the way on current trends would not surprise me.

Personally I think that is both disappointing and a mistake, but the strong industrial production figures in 2017 and in the first five months of 2018 have no doubt given the Central Bank the reassurance it needs that the economy is fully able to withstand its “moderately tough monetary policy” for a while longer.

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