28/12/15: BOFIT summary of 2016 outlook for Russian Economy

Per recent BOFIT summary:

“Forecasters see the Russian economy contracting slightly in 2016. Recent economic forecasts, with the exception of the brighter projection of Russia’s economy ministry, see GDP contracting about a half per cent. A couple of forecasts expect a drop of about 1 %. The average price of oil next year is assumed to average $50–55 a barrel.

Most forecasts also see imports declining a bit further. Almost all forecasts see private consumption shrinking next year, most by about 1 %.

The CBR’s forecast update this month, however, reduced its earlier projection and now expects private consumption to contract by nearly 4 %. The consumption projections reflect the anticipation that household income growth will not keep up with inflation, especially as increases of public sector wages and pensions have been set very low due to the frail condition of government budgets.

The forecasts also see fixed investment slipping further by roughly 1 %. Estimates of the volume of Russian exports vary more widely, but forecasters generally expect exports to rise slightly in 2016.”

My view on Russian economic growth prospects for 2016 were reflected in my column for Slon.ru: http://trueeconomics.blogspot.ie/2015/12/151215-russian-outlook-for-2016-slon.html.

26/3/15: BOFIT Latest Forecasts for Russian Economy 2015-2017

BOFIT published their new forecasts for the Russian economy. Here is the summary with my comments:

Pre-conditions: "Russian economic growth has slowed for three years in a row, due to e.g. waning growth in the available labour force, capital and productivity. In addition, a slight decline in export prices, the Ukraine crisis, sanctions, Russia’s counter-sanctions and other negative measures, with the accompanying increase in uncertainty, slowed Russian GDP growth to just over 0.5% in 2014. ...The impact [of oil price drop in H2 2014] began to show in the early months of 2015, with a slight contraction in GDP. Without transient factors, the economy would already have contracted in 2014."

What transient factors supported growth in 2014?

• "As in 2013, industrial production was partly supported by strong growth in defence spending."
• "The depreciation in the real exchange rate of the rouble since the early months of 2013 has [created room for some industrial imports substitution], and may also have slightly boosted exports of certain non-energy basic commodities."
• "The rouble’s strong depreciation led to consumer spending rushes, which kept private consumption growth at some 2%. However, wage growth slowed, as did pension growth. Inflation rocketed (to almost 17% in February) on the back of rouble depreciation and Russia’s counter-sanctions in the form of restrictions on food imports. Consequently, real household incomes contracted in annual terms for the first time since 1999. Aggregate income was underpinned by employment, which remained buoyant for the time being. Household borrowing decreased further."
• "Steered by the government, investment by most large state enterprises was relatively high. This was, however, insufficient to prevent total investment from falling by some 2%. The net capital outflows of the corporate sector increased, due partly to repayment of foreign debt and considerable constraints in access to foreign funding as a result of domestic uncertainties and external financial sanctions."

External position forward: "Export volumes declined by 2%. Exports of crude oil and gas dwindled markedly, while exports of petroleum products continued to grow at a robust pace. As the fall in ex-port prices steepened, export income in the last months of 2014 was already well over 10% lower (in euro terms) than a year earlier. Import volumes declined by 7% in 2014 and have now been in decline for 1½ years. The decline steepened considerably towards the end of the year."

BOFIT forecasts for 2015 assume oil price at USD55 pb and above and sanctions and counter-sanctions to remain in place "unchanged for a relatively long period".

"The impact of [oil price] change will be profound, since energy exports ac-count for almost a fifth of Russia’s GDP."

Do note: energy exports include not just crude petroleum and natural gas, but also refined products and electricity (including nuclear). This puts the Russian economy into perspective not usually considered in the Western media - the economy is much more diversified than many believe and claim. Further note, energy (total energy, not just oil and gas) accounts for just over 60% of total exports income.

Outlook summary: "...Russian GDP will contract by over 4% in 2015. The high degree of uncertainty will cause a shrinkage in private investment, while private consumption will be cut particularly by rapid inflation. Even though Russian imports have already edged down, they are estimated to fall further, by one fifth, in response to the sharp depreciation of the rouble during the last months of 2014. In 2016–2017, global economic growth and world trade will pick up, and it is assumed the oil price will rise to around USD 65 a barrel. The Russian economy is expected to continue slightly downward, before a slow recovery in 2017. The drop in investment is expected to flatten out towards the end of the forecast period. With real household income remaining low, it will also take time for private consumption to recover. Export volumes will grow at a very subdued pace. Imports will recover after 2016."

All in-line with my own outlook.

Private consumption "…will decrease substantially in 2015, and slightly further in 2016" driven primarily by inflation eroding household incomes and weak prospects for growth in private sector wages in nominal terms and public sector wages expansion below the rate of inflation. Notably, "the government is also seeking to cut the number of public sector employees." BOFIT expects pensions to "barely keep pace with inflation, at best".

Household credit will remain subdued, "even though the debt-servicing burdens stemming from payback of short-term loans will ease gradually. As during the crisis of 2009, savings may be rather substantial."

Public consumption "will decline amid pressures on the central government finances."

Investment "…will dwindle substantially this year and next. Private investment, in particular, will be depressed by a number of uncertainties relating to the ongoing tensions in East Ukraine, uncertain prospects for sanctions and the unpredictability of Russian economic and trade-related measures stemming from possible additional sanctions and recession countermeasures." So no surprises, then.

Fiscal side: "…the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP)."

The longer-term outlook is deteriorating: "The foundations of growth are being eroded by the contraction in private investment. Government spending is focused increasingly on defence and pensions, while public investment is subject to the largest cuts."

Chart below summarises forecasts:

Sources: Rosstat, BOFIT Forecast for Russia 2015–2017

16/9/2014: If China Growth Fall-off is Structural... Who's Going to Drive Global Growth?..

BOFIT published their revised forecasts for Chinese economic growth 2014-2016 and the numbers are just not pretty... not quite ugly, but not pretty. 2014-2015 forecast is for 7% growth - which is a 'psychological' bond for growth in China as it entails a 10-year doubling horizon and is alleged to be supportive of demographic changes. 2016 growth forecast is for 6% - or sub-7% magic number.

All in, 2014-2016 are expected to show slowest growth since the start of the millenium and these come on foot of two previous years of growth below 8%. So far, H1 2014 posted growth of 7.5%, down from 7.7% growth in 2013.

Interestingly, BOFIT note: "If the indicative data showing a relatively good employment picture are credible, even growth lower than forecast here may be suffi-cient to satisfy the needs of the Chinese society. China’s traditional official growth targets, crystallised in a single number, have outlived their purpose. They fail to guide market ex-pectations and policies in a way that reflect economic fundamentals."

The drivers of Chinese economy slowdown appear to be very similar to those impacting Russian economy: exhaustion of the investment boom. "The current slowdown in growth is quite natural given the size of China’s economy, its resource demands and increased level of development, but there are also other factors con-tributing to the slowdown. In the wake of a decade-long investment boom, new investment no longer delivers the same “bang for the buck” it did earlier. A corollary to China’s aging population is the decline in the number of work-age people. Vast environmental degradation comes with hefty costs that are already eroding growth. Finally, short-term growth will be subdued by high indebtedness that limits the government’s room to manoeuvre in the fiscal and monetary policy spheres."

The Big Hope has always been that falling investment will be offset by rising consumption. Which is what provides upside support to BOFIT forecasts. But one must ask a simple question: if debt is already a problem, who will be paying for this increasing consumption?

In case you wondered, that 'soft landing' meme is still around, but it is now being increasingly questioned: "A controlled “soft landing” for economic growth is by no means a given at this point. Remaining on the appropriate glide path will require strong economic and reform policies. The rising indebtedness of firms and local governments remains a top challenge for China’s multi-tiered economic policy matrix. Worryingly, the credit boom in China this decade tracks several earlier credit booms in other countries that ended in crisis. Darkening the mood further is an impending correction in the real estate sector. While Chinese financial markets have been relatively calm in recent months compared to a year ago, the shadow-banking sector continues to grace the headlines with stories of defaults and other problems. "

Key point is that China is not expected to support significant upside to global growth through 2016. And this leaves global growth dependent on G7...

Full forecast is available here: http://www.suomenpankki.fi/bofit_en/seuranta/kiina_ennuste/Documents/bcf214.pdf