Page 13 - RusRPTAug24

2.2 Russia’s economy is overheating: is that a problem?
The overheating of the Russian economy is now an accepted fact. Top officials including Central Bank head Elvira Nabilullina, and the head of state-owned banking giant Sberbank German Gref, talk about it openly. Increasingly, it’s only Russian President Vladimir Putin still championing Russia’s high growth as a major achievement without any awareness of the possible downsides. Despite efforts by the Central Bank – particularly high interest rates – it has proved extremely hard to effectively cool the economy. Everyone understands that overly rapid growth in wartime is dangerous, but what exactly is the threat? What’s going on?
“If we try to drive faster than the car is designed to go, if we stamp on the gas with all our strength, sooner or later the engine will overheat and we won’t get far. The journey might be fast, but it won’t be long,” Nabiullina warned at the end of last year.
In short, overheating means that the economy is operating at its limits, and that productivity is not keeping pace with demand. It is invariably accompanied by rapid economic growth, which means, from the outside at least, it can often appear to be a good thing.
Economic growth in Russia is indeed continuing at a furious pace. Last year, Russian GDP expanded 3.6%, which was above the world average of 3.1%. And in the first quarter of this year, Russia’s economy grew as much as 5.4%. The World Bank has already had to twice upgrade Russian GDP growth forecasts for 2024 – from 1.3% to 2.2%, then to 2.9%.
Symptoms of overheating .
There are many symptoms of an overheating economy. The IMF, for example,
has nine
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indicators to determine overheating:
Output relative to trend
Output gap
Unemployment and inflation levels External trade conditions
Capital inflow
Current account
Increases in credit, property prices and share prices Extent to which the budget is balanced
Real interest rates (rate minus inflation)
In Russia, the two primary indicators of overheating are inflation and labor shortages, according to the Central Bank. These two indicators are closely linked: high consumer demand pushes up prices. And that demand is fanned by uncontrolled wage increases (21.6% in March compared to the same month a year earlier). Wages are rising particularly fast in industrial regions with the biggest increases in Siberia’s Kurgan Region (+33%) that is home to the only factory in Russia manufacturing infantry combat vehicles.
13 RUSSIA Country Report August 2024 www.intellinews.com