MEDT: Russian economy to move into prolonged economic recession in 2015

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The Ministry of Economic Development predicts a substantial real wage reduction in Russia in 2015 in comparison with 2009 

In 2015 Russia will move into a prolonged economic recession, says the updated macroforecast for 2015 issued in February, 17 by the Russian Ministry of Economic Development.

External influences

"With the serious geopolitical risks and the hypothetical average annual oil price of $ 50 per barrel in 2015 the GDP is supposed to drop 3%. According to the forecast estimates, in 2015 Russia will move into a prolonged economic recession," states the document.

The dynamics of production in 2015 will be greatly affected by the reduced export earnings from selling energy to the world market and the closure of the global capital market.

These factors taken together will lead to the reduction in the real disposable income of population with further weakening of the consumer demand and investment activity, says the MEDT.

At the same time production will significantly be supported by the economic profit increased mainly due to the weakening of the national currency, as well as a severe contraction in import of goods and services.

One of the factors working against the general economic recession in 2015 will be a slight decrease in industrial production (-1,6%). This will be resulted by a considerable output reduction of processing enterprises in times of stagnation (extraction of oil) and a minor production slowdown (gas recovery) of export-oriented industries.

However, the issued socioeconomic development forecast is based on the hypothetical changes in external and internal factors, including trends in prices for oil and other export products, deterioration in the external economic environment, geopolitical tension and further sanctions against Russia, states the forecast.

Anti-crisis measures

The MEDT expects the anti-crisis measures plan to slow the declines in GDP by 0.9 percentage points (p.p.).

"Implementation of the package of measures adopted by the Russian Federation government to secure sustainable economic development and social stability will mitigate economic recession in 2015 for a number of most important macroeconomic indicators," says the document.

The Ministry thinks that the growth in allocations for loans to the regional budgets and support to industries will lead to an increase in fixed investments from all sources of financing by about 2 p. p. in comparison with the plan not including these anti-crisis measures.

A set of measures to support vulnerable populations even with a related insignificant inflation increase will provide additional 1.1% increase in the real income of the population.

"This increase will have a positive effect as a way to support consumer demand, as well as it will reduce the depth of the recession in retail trade turnover by 1.2 p. p. and the volume of paid services rendered to the population - by 0.8 p.p. An increase in fixed investments, industrial production and a relative revival of consumer demand will reduce the decrease in import of goods by about 2.5 p.p.," says the document.

Decrease in investments

According to the forecast, in 2015 fixed investments will be reduced by 13.7%, according to the updated macroforecast for 2015 issued today by the MEDT of Russia. Last year they dropped by 2.5%.

The high cost of the borrowed funds, the appreciation of import investment goods, the increase in debt burden and the general economic insecurity of the investors will reduce the investments of private companies by 15.3% compared to those in 2014, noted in the MEDT.

The main contribution to the reduction will be made by such industries as construction and real estate operations, rent and provision of services, that will experience a stronger reduction of investments in the second half of 2015, when the current facilities are completed and the decisions to start the new ones will probably be postponed.

Investment demand contraction of the infrastructure sector is connected with the cut of the investment programs in power industry (including the raised prices for the imported equipment), oil and gas sector as a result of stagnation of the output in the extractive industries and rail transport.

According to the updated macroeconomic forecast of the MEDT, strict budget constraints, in their turn, will maintain a negative trend to reduce the state capital investments.

Reduction in salarie

The real wage reduction in Russia will be more significant (9.6%) in 2015 in comparison with that in 2009 (3.5%) according to the socioeconomic development forecast for 2015, prepared by the Russian Ministry of Economic Development.

"This is largely due to the increase trends in public sector salaries, which will continue to slow down due to the reduction of budget financial capabilities," notes the forecast.

The forecast says that, as in the crisis of 2008-2009, the businesses will use wage reduction (part-time / week, the variable salary part) as a possible means to reduce their labor costs.

Support of the real economy, small and medium-sized enterprises, expanding the availability of credit resources will reduce the negative impact of this factor on the real wage trend in the corporate sector.

The negative real wage dynamics in 2015 will directly influence the real disposable income of population, which will expectedly be reduced by 6.3% in 2015.

However, the real disposable income of population will be reduced to a lesser extent in comparison with the real wage. A similar situation was observed in 2009, when the real income increase was 3% with a 3.5% reduction in real wage.

The highest inflation rate - at the end of the first quarter

In 2015 the MEDT expects the highest inflation of 17-17.5% at the end of the first quarter - at the beginning of the second one, states the forecast. At the first quarter the average inflation rate will be 2.2-2.3% per month.

At the second quarter the average monthly rate will be slowed down more than twice, up to 1%, with the stabilization of the rubles exchange rate and growing demand constraints, says the MEDT.

The highest inflation rate of about 17-17.5% will take place at the end of the first quarter - at the beginning of the second one, state the MEDT`s documents. In the second half of the year the prices will grow much slower due to a significant contraction of the effective demand. By the end of 2015 the inflation rate will amount to 12-12.4% (the estimates state 12.2%). An average annual inflation rate will make 15.8% versus the previous year, notes the MEDT.

Text and pictures by TASS