Russian macro: Central Bank gets more hawkish amid economy's overheating
In a recent report we mentioned that in 1H24, as Rosstat reported, the output of the five basic sectors (industry, agriculture, construction, trade, transportation) grew by 5.8% y-o-y. In June alone it was up by a mere 2.5% y-o-y, and as a result, basic sector output grew by 4.8% y-o-y in 2Q24. Even though the economy has slowed in June, this deceleration looks like a one-off effect stemming from fewer working days in June this year. This difference (2 days) affected almost all segments of the economy, and to some extent, could be a counter balance to February’s positive leap-year effect. Hence we have no reason to materially change our growth forecast for this year (4%), even though inflation will exceed expectations because nominal wages will not suddenly stop growing. Budgetary expenditures will remain as generous as in 1H24, while as of July 29, inflation YTD reached 4.99%.
The CBR recently upgraded its 2024 growth forecast to 3.5%-4.0% (having also raised its inflation forecast—up to 7% as the upper boundary). Apart from a quite optimistic 2024 inflation forecast, the forecast raises questions about the growth outlook next year and beyond. As the economy continued to grow steadily in 1H24 (heading toward 4.0% growth this year), it seems peculiar that the CBR projects 0.5%-1.5% GDP growth next year. Indeed, in the “factors being equal”, i.e., baseline scenario, 1.5% growth in 2025 implies Q-o-Q growth of about zero in seasonally adjusted terms starting from 1Q25. Furthermore, 0.5% GDP growth in 2025 means Q-o-Q contraction by about 0.4% from 1Q25, i.e., a recession. If so, then an obvious question arises—was raising the key rate worth it?
There are more peculiarities in the CBR’s medium-term outlook, such as suddenly nearly-stagnating investments and sluggish consumption growth in 2025 and beyond. We think that in the “factors being equal” scenario, the reality will be different and somewhat brighter than the CBR suggests. Hence we do not change our 2024-2025 GDP growth forecast despite the CBR's increased hawkishness.
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