Why is the Russian economy on the brink of stagnation?

Author: Olga Samofalova

The Russian Ministry of Economic Development has pointed out that signs of a cooling economy have appeared in Russia. The central bank should have cut interest rates earlier to avoid the situation getting out of control, especially as inflation has remained at a low level of 3%-4% in recent weeks. However, will the regulatory body take this measure? Where is the balance between curbing inflation and slowing the economy?

Maxim Reshetnikov, Minister of the Russian Ministry of Economic Development, stated that his department had noticed the signs of economic cooling. He also noted that inflation indicators have been controlled within the range of 3%-4% in recent weeks, indicating that inflation is slowing down. Despite some differences in weekly and monthly inflation data recently, he expects this trend to stabilize by the end of May.

"We expect the Central Bank to take this into account in its decision-making process in time to avoid the risk of excessive cooling of the economy," Reshetnikov said at a meeting of the State Duma Budget and Tax Committee.

He believes that the 7.6% inflation forecast for Russia in 2025 is realistic.

Previously, on May 13, Russian President stated that the authorities must achieve a slowdown in inflation but warned against letting the economy fall into stagnation in the process.

The cooling of the Russian economy is first reflected in the halving of the growth rate of the economy compared to the same period last year. In the first quarter of 2024, the GDP grew by 5.4%, while this year it only grew by 1.7%; if calendar factors are excluded (the first quarter of 2024 had one extra day due to leap year), the GDP growth was 2.3%.

"Signs of cooling in the economy are evident in the slowdown of growth across multiple industries, including food processing, chemical industry, and machinery manufacturing. The Central Bank has also noticed cooling trends in construction, coal mining, and metallurgy," said Vladimir Chernov, an analyst at Freedom Finance Global.

This expert added that the purchasing managers' index (PMI) for Russian manufacturing and services showed that manufacturing remains in a recessionary phase, while services are on the verge of stagnation.

In addition, retail and corporate credit growth slowed significantly in the first quarter, with mortgage lending volumes declining sharply, and consumer and auto loans falling at double-digit rates.

"If the benchmark interest rate remains high, it may lead to further slowing of the Russian economy. High borrowing costs will limit investment and consumption, increasing the risk of economic recession," Chernov noted.

"High interest rates have already taken effect: consumer demand has been suppressed, business order volumes have decreased, and the pace of corporate and consumer credit issuance has slowed down. For example, car loan issuance fell nearly one-third year-over-year in April," noted Kirill Sherezhenyov, a stock market expert at Gardar Capital.

However, this expert added that the key point is that the speed of price increases is beginning to decline: as of May 19, annual inflation fell below 10% for the first time over a long period.

Sherezhenyov said, "Nevertheless, inflation remains high, and the downward trend is not stable, and moreover, inflation expectations unexpectedly rose among the public in May. This means that relatively high interest rates may still persist for quite some time until a stable disinflationary trend is achieved."

Recently, many experts expected the Central Bank to start cutting interest rates in June. However, finding the optimal time to enter the interest rate cut cycle is not easy for the Central Bank.

Sherezhenyov said, "Financial authorities need to find a balance between measures to curb inflation and supporting economic activity. The Ministry of Economic Development is more optimistic about GDP indicators, and its position on lowering the benchmark interest rate is completely understandable. We believe that the Central Bank may cut interest rates slightly in June, with a possible reduction of up to 500 basis points, and the benchmark interest rate may fall to 17%-18% by the end of the year." This expert predicts that the economy will remain at low growth (1%-1.5%) at that time, with the annual inflation rate dropping to 7%-8%.

The Ministry of Economic Development's forecast is more optimistic, predicting GDP growth of 2.5%, while the Central Bank's forecast is more conservative, at only 1%-2%. Chernov concluded, "I believe we can avoid a recession, and the economy is expected to achieve a 'soft landing'."

Original article: https://www.toutiao.com/article/7508998314054943244/

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