Russian Macro: GDP Growth to Slow: Aftermath of Overheating
A month ago, in the aftermath of the its key rate hike decision, the CBR warned that the Russian economy is operating at full capacity and the demand is overheated by domestic credit and generous budgetary spending. Hence, inflation was high and accelerating. Therefore, some decisive action was required from the monetary authorities. Having raised the key rate by 200 bps, the CBR hinted that the Russian GDP will grow by about 0.5% to 1.5% in 2025 (it is worth noting that it grew by 4.6% y-o-y in 1H24). Interestingly, the CBR published its recent economists’ survey a couple of days ago, and the consensus among them was that after the 3.6% growth they expect in 2024, next year the economy may grow by 1.7%, which is not too far from the CBR’s upper boundary. Generally, these forecasts mean that the economy is about to stop growing Q-o-Q.
Despite mounting pressure from the Western countries and permanently emerging additional difficulties that stem from the Western sanctions, we expect somewhat stronger growth in 2024, followed by a deceleration next year, albeit not to the same extent as the CBR suggests. Even though some segments of the economy face certain problems, others continue doing relatively well. Currently, it looks as though difficulties with settling foreign trade payments are among the most acute problems for the Russian economy. The recently published 7M24 statistics doesn’t indicate that the economy is about to stop growing Q-o-Q or m-o-m. Domestic demand remains strong as retail sales and household consumption in general expand steadily. Government demand will is not collapsing while investments are on the rise.
Assuming other factors being equal, i.e., no major shocks in the remaining months of 2024 and in the year 2025, Russia’s economic growth prospects do not look too bad at the moment. For instance, a relatively high base accumulated in 7M24 on the household consumption side will automatically lead to decent y-o-y growth numbers in 1H25. The ongoing growth deceleration is natural amid attempts to cool down overheating and bring inflation down but we still believe that the economy is heading toward over 3.0% GDP growth in 2025 in the no-shock scenario. Short-term trends in various segments of the economy and the associated inertia do not point to a sudden drop in GDP growth to 1.7% next year as the aforementioned consensus forecast suggested.
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