Russian macro forecast: Growth model to evolve – investment to play a greater role
In 2021 as a whole, Russia's GDP will well exceed its pre-pandemic level as, having contracted by 3.0% in 2020, its growth this year can reach 4.2-4.3%. This will require a rather unusual and strong q-o-q growth in 3Q21 and 4Q21, which in not impossible as the services sector has potential to expand. Nominal GDP in 1H21 accounted for R57.6 trln, which is above earlier expectations, as higher inflation helped to boost it. In 2021 as a whole, GDP may exceed R120 trln, which will bring the dollar-denominated figure above $1.6 trln.
Economic growth is set to moderate in 2022 to 2.7-2.9%. The elevated key policy rate will eventually affect the consumer lending market, and borrowing will become less tempting amid decelerating price and wage inflation in 2021.
Consumer demand will gradually cool down in 4Q21, and household consumption is expected to expand in 2021 a bit less than anticipated several months ago. Household consumption can grow by around 6.0% this year. Government consumption will grow only marginally this year.
At the same time, given that corporate profits have been strong this year and the bulk of investments are financed not with bank credits, but with retained earnings, investment in production capacity will grow much more this year than previously expected – by around 6.7%. Overall investment activity will be supported by government spending on national projects, including those financed from the National Wealth Fund.
* In 1H21, GDP was up by 4.8% y-o-y, while it contracted by 3.4% in 1H20. Industry, construction and trade will grow fast this year. Apart from them, very strong growth of the financial sector, which together with insurance represents 5.1% of GDP, is also expected. It was up by 9.8% y-o-y in 1H21 and will grow even faster in 2H21 amid the increased key rate. As one can expect even double-digit growth in this sector, it can contribute up to 0.5% to GDP growth alone.
* The planned 2021 federal budget revenues were supposed to reach nearly R18.8 trln. In 8M21, they had already reached R15.7 trln (83.6% of the annual target) and are likely to exceed the plan by around R5.0 trln and possibly even more, as high inflation helps collect more non-oil-and-gas taxes.
* Disinflation in 2021 expected earlier in 4Q may be rather slow, as it becomes increasingly likely that the government will amend the budget and significantly increase the spending to be allocated in 4Q21. Inflation is expected to reach 6.3% in 2021, while in 2022 it will fall to 4.3%.
* The CBR's interest rate policy will remain conservative in 2022. After inflation starts to decelerate, it will take the regulator some time to consider key rate cuts, especially if the CBR decides to reduce the medium-term inflation target. The CBR hinted in mid-summer that it will review its monetary policy by the end of 2021 and potentially make some changes.
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