The economy keeps adjusting to new realities

RUSSIA ECONOMICS - In Brief 06 Jun 2024 by Evgeny Gavrilenkov

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Rosstat reported that in 4M24, the combined output of the five basic sectors (a monthly proxy for overall economic activity) grew by 6.3% y-o-y. In April alone it was up by 5.5% y-o-y. Despite some deceleration the overall figure looks decent. Economic growth is largely driven by expanding domestic demand as retail sales grew y-o-y by 9.9% and 8.3% in 4M24 and April. In 1Q24 investments in production capacity increased by14.5% y-o-y (only quarterly investment statistics are available). Construction grew y-o-y by 3.8% and 4.5% in 4M24 and April pointing to some acceleration after a relatively slow growth in March. Budgetary spending is helping to keep domestic demand elevated, but it is not the only factor securing GDP growth. We previously mentioned that the emerging growth trajectory would imply more investment in infrastructure, logistics, etc., necessary to strengthen economic relations with non-Western countries. At the same time, the government and businesses will be thriftier and stop saving in foreign assets as much as they did in the past. Restrictions imposed by Western governments also encourage people to enjoy life locally, which stimulates the services sector. It looks as though recent statistics indicate that the economy is evolving in this direction. The side effect of massive domestic spending is elevated inflation and higher interest rates. The latter is not yet crucial as the economy is not yet hooked on borrowing and the total debt is low. GDP may grow by over 4% this year.