Russia’s economic growth is expected to speed up in the medium term
This is a suggestion presented in The Macroeconomic Review prepared by the Directorate for Research at the Eurasian Development Bank (EDB).
The Bank’s analysts expect that, after a decline in economic activity in the first six months of the year, GDP growth rates will improve to 1.1% in its second half. The recovery of growth will be associated with improvements in the dynamics of investment driven, among other factors, by increased fiscal capital expenditure and a reduction in the Bank of Russia’s key rate. However, compared to the previous forecast (April 2019), the estimate was decreased by 0.4 percentage points to reflect, in the first place, the slowdown in the global economy and a lower speed of the implementation of national projects. The EDB forecasts Russia’s GDP growth in 2020-2021 to speed up to 2% a year with the gradual accumulation of the effects of national projects and measures to improve the business environment.
The review notes the appreciation of the Russian rouble during the first six months of 2019, supported, among other factors, by the inflow of non-residents’ funds into federal loan bonds restored amid lower devaluation and inflation risks, as well as a relatively high yield of Russian assets.
Marat Kussainov, Deputy Chairman of the Management Board at the EDB, pointed out to a rapid slowdown of inflation in Russia in the second and third quarters of 2019 as a result of the appreciated rouble and limited domestic demand. According to the EDB’s forecast, these factors will continue to persist in the fourth quarter and constrain the growth of the consumer price index to 3.5% by end-2019. The medium-term inflation is expected to be around the Bank of Russia’s targets.
The EDB analysts suggest that the monetary policy may be eased off by the end of 2019. Marat Kussainov believes that there is potential for the key rate to be further reduced as inflation will stabilise around the target.
The authors of the review note that the key risks for the Russian economy are external ones and are associated, among other things, with the possible recession in the global economy in the context of the growing controversies in trade between the U.S. and China. If the unfavourable scenario materialises, it will affect Russia’s economic growth, primarily through foreign trade and investment. The internal risk factors, according to the EDB analysts, include the uncertainty as to the speed and efficiency of national projects, as well as the areas of spending of the liquid portion of the National Wealth Fund in excess of 7% of GDP.