Page 124 - RusRPTJul22

Economic activity. High-frequency indicators point to a halt in the decline in business activity in May after it dropped sharply in April. At the same time, trends across sectors were mixed.
The decline in economic activity is caused by developments in both demand and supply. Survey data show that enterprises are still struggling to fix production and logistics — despite the nascent diversification in suppliers of finished products, raw materials and components, as well as in sales markets. Consumer activity in real terms is on the decline as households show a high propensity to save and real incomes shrink.
The external environment for the Russian economy remains challenging and significantly constrains economic activity. The contraction in imports due to the introduction of external trade and financial restrictions is considerably outstripping the decline in exports.
Overall, the actual decrease in economic activity in 2022 Q2 is less pronounced than the Bank of Russia assumed in its April baseline scenario. Given the above, the Bank of Russia estimates that the 2022 GDP decline could be lower than forecast in April.
Inflation risks. Proinflationary risks continue to abate, though remaining considerable.
The movements of the economy and inflation largely depend on fiscal policy decisions. The Bank of Russia takes into account the decisions already made regarding the mid-term expenditure path of the federal budget and the fiscal system as a whole. In case of a further budget deficit expansion, tighter monetary policy may be required to return inflation to target in 2024 and keep it close to 4% further on.
Over a short-term horizon, the effect of proinflationary factors is likely to be accentuated by high and unanchored inflation expectations. An excessive reduction in households’ propensity to save may lead to consumer demand outstripping the capacity to expand output.
Disinflationary risks to the baseline scenario are mainly linked to a consistently high risk premium in credit rates and banks’ elevated requirements for borrowers amid high uncertainty. This may cause a greater slowdown in lending.
The combination of risks created by the external environment may
124 RUSSIA Country Report October 2020 www.intellinews.com