Page 27 - RusRPTAug24

In addition, inflation and personnel shortages primarily indicate overheating, according to the latest summary of the discussion of the Central Bank’s key rate. These two indicators are closely related: prices are pushed up by high consumer demand, partially locked within the country, and demand itself is spurred by uncontrollably growing wages - by 21.6% in March.
“The overheating is associated with an unexpected restructuring of the economy: many players left, a lot of imports left, many supply chains were destroyed,” lists Alexey Kiselev, a researcher at the Florence School of Banking and Finance. That part of the Russian economy that “remained alive” received an additional incentive to replace imported goods against the backdrop of a redistribution of demand and accompanying price adjustment.
The main culprit in the current situation is the state, namely the stimulating budget policy, experts from the Gaidar Institute state. According to their estimates, in 2022 and 2023, budget system expenses increased by 17.2% and 14.2%, respectively. Behind these figures, of course, is primarily the increase in military spending.
In an attempt to cool the economy and stabilize inflation, which by the end of June reached 8.6% in annual terms, the Central Bank has kept the key rate at 16% for more than six months and may raise it to 18% at the next meeting. Such a tough policy, in theory, should lead to a cooling of the economy - the higher the rate, the more expensive loans are, which means demand and inflation should contract. But this is not happening yet. The reason may be problems with the high rate transmission - that is, with how it affects the economy. This may be due to the large share of non-market money entering the economy, primarily through preferential mortgages. It turns out that the Central Bank, with its rate, indicates that money in Russia cannot cost less than 16%, and at the same time the state is handing out trillions in the form of mortgages at 8%. As a result, tough policies work worse. But from July 1, the most widespread program of preferential mortgages will be closed - this should simplify the transmission.
What will happen next?
Determining the level of overheating is quite difficult. Bloomberg's chief economist for Russia, Alexander Isakov, based on his own model, estimated the output gap in the first quarter of 2024 at plus 3% of GDP. Economists of the Central Bank in their recent work calculated that overheating of 3% of GDP was achieved at the end of 2023.
There is no clear opinion yet about what will happen after overheating. A positive output gap could lead to a recession, wrote the economic telegram channels “Hard Figures” and MMI. Simply put, this means reduced economic activity, falling employment and lower income. “But often the overheating cools down on its own. There are schools of economic thought that say: if you treat a cold on your own, it will go away in a week, and if you don’t treat it, it will go away in seven days,” says an economist at a Russian bank. TsMAKP experts also agree that there is no risk of recession on the near horizon. But the Central Bank’s cooling measures on the economy under sanctions may lead to a slowdown in investment and GDP growth (to 1.5–1.7%), according to another report of the organization.
27 RUSSIA Country Report August 2024 www.intellinews.com