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Friday, October 28, 2016

The economy is bottoming out: Russian GDP continues to fall

Almost simultaneously came two important documents: first, next “Comments about the state and business (KGB) from the Higher school of Economics, then the next review of the Bank of Russia “as evidenced by trends”. The statistics are there, and there rostovska, and your conclusions. And the opposite. HSE believe that the Russian economy plunged into the bottom in the Central Bank that recession is over, ahead of a slow but still growth. Who is right?

From under the rubble

HSE experts from the first pages start a dispute with the Central Bank. The last time, leaving its key rate unchanged at 10.5 percent, the Central Bank cited the recovery in manufacturing activity in the Russian economy. In her HSE and do not see, saying: “Looking at the same statistics, we estimate the macroeconomic processes occurring differently than the Bank of Russia; if to speak frankly, is more pessimistic.

Basing on the data of Rosstat, the HSE concluded: “In the first half of 2016 saw a decline in almost all economic activities, i.e. the compression process of the economy is a “wide front” across all sectors”. The only exception is the wholesale trade demonstrated the growth by the fourth quarter of 2015 is 1.7%. It is important that, according to the HSE, the pace of economic decline is not reduced, and growing GDP after declining in the first quarter by 0.6% (-1,2% to the corresponding period last year) decreased in the second quarter, according to our estimates, 0.8% (-1,4% year-on-year).

If GDP will cease to decline, the total drop will be 1.5%, much lower than the may forecast of economic development for this year (-0,2%)”.

Here it was possible to make your point. But the HSE’s overall assessment of the dynamics of GDP are not limited, and the picture is not as monochrome. HSE acknowledge that the industry is showing positive growth year-on-year, but, “despite the increase in yoy industry (in January-June by 0.4% year-on-year), this does not mean that it will be able to pull up the entire economy, at least in the coming months.”

Important: HSE do not see any drivers of growth. It’s not the industry (the demand for products growing sectors of the industry unstable), not consumer demand due to falling real incomes, not net exports (contribution to growth in GDP in annual terms in the first quarter of 2016 fell from 6.4 percentage points last year to 0.5 percentage points), not investment (the contribution of which is especially sad, and not at all negative).

“The recession is over!”

What’s different perspective on the economy from the Bank of Russia? Assessment of recent changes. If we restrict ourselves to the industry, the position of the Central Bank is as follows: “June Rosstat data on industrial production point to a gradual recovery of economic activity. In annual terms, industrial production growth accelerated to 1.7% year-on-year (yoy) vs. 0.7% yoy in may 2016. Overall industrial production rose 0.4% yoy in the first half of 2016”.

CB says: “it is Worth noting that the production of the manufacturing sector, which was the main driver of the observed volatility in the previous months, gradually recovered, leaving a positive annual growth rate in the second quarter of 2016. And concludes: “As stabilization in the manufacturing sector is key to the restoration industry as a whole, the latest data can talk about the continuation of the stabilisation period”.

Conditional growth driver, thus the Bank of Russia still found. Although the Bank prudently stipulates: “nevertheless, the volatility and mixed trends across industries may persist in the coming months to transition to a more sustainable recovery.”

Note: if the HSE operates the data of the first half as a whole, for the Central Bank it is not so much all semester, and how it ended. The approach is understandable and in their own tech — TSB publishes it, “he said to the trends in the monthly, but still risky: monthly statistics (we are talking about June) could not cope with the role of the beacon and may well not be by Ivan Susanin. Moreover, the dynamics of the manufacturing industry — the same conditional driver industry, as noted in the HSE, hardly drags the entire economy.

All this, however, does not deter the Central Bank from the proclamation in a loud and solemn conclusion: “the Recession is behind, ahead — slow growth of the economy.” Justification has already been named, but let’s repeat once again after the Central Bank: “the June statistics on the Positive dynamics of production in the manufacturing sector was the main source to improve our estimates. Remember.

Optimism declared Grand and loud, but in numbers it more than modest: the July valuation increased slightly compared with the June forecast. In the third quarter is now expected GDP growth of 0.4% compared to the June estimate of 0.2 percent in the fourth quarter, respectively, 0.5% compared with 0.4 to 0.5%.

It is necessary to bring the opinion of Rosstat with Ministry of economic development. Rosstat according to preliminary estimates, the decline in GDP in the second quarter at 0.6% in annual terms. In the first quarter, the GDP of Russia, according to Rosstat, was twice as deep and was 1.2%. “The index of physical volume of gross domestic product in the second quarter of 2016 compared to the corresponding period in 2015, according to preliminary estimates, amounted to 99,4%”, — stated in the message of Rosstat.

With Rosstat fully according to the Ministry of economic development: the decline of Russia’s GDP in the second quarter slowed to 0.6% yoy after a decline of 1.2% in the first quarter. In the first half of the year, Russia’s GDP decreased by 0.9% in annual terms. Underlying the Ministry’s forecast, calculated based on the average price of oil in 40 dollars for barrel, involves the decline of Russia’s GDP by the end of 2016, by 0.2%.

What fuels the optimism of the Central Bank?

Back to the dispute of the Central Bank and the HSE. Comparison of the two documents opens a wide scope for all sorts of speculation. Why, in principle, based on the same statistics, experts radically disagree on the findings? Is it because CB is one of the main headquarters (and if you call a spade a spade, that’s exactly the main staff) of economic policy and HSE experts are positioned as independent observers? Questions can be multiplied.

But do they need it? Someone might notice that the whole argument of the HSE and the Central Bank is a dispute about which end to break an egg. Indeed, the gap between the Central Bank and the HSE, despite loud verbal differences in numbers, especially in statics, not so great. The pros of a percent of GDP in one case or cons is another important for scientific gradation, but in reality mean only one thing: the state of the Russian economy is described by the formula “okolonolya”. In the sense that, at least for now, for Russian citizens the fundamental difference is, if GDP falls by a percent or the same amount to the same in principle, remaining in the area of statistical error, growing, no.

There is a difference in dynamics, in opening prospects. They are from the Central Bank and the HSE disagree.

We have already answered the question of why, in principle, that the same statistics in the interpretation of the HSE and the Central Bank leads to diametrically opposite conclusions. Will add specifics. Macroeconomic optimism of the Central Bank nourish not only pure scientific research, but purely a business need. The declared end of the recession should cut the ground from under the feet of critics of the Central Bank, those who consider that the reduction of the key rate of the Central Bank ought to hurry.

The response of the Central Bank, the current level of rates does not prevent, but rather contributes to economic recovery and transition to growth, albeit modest measured in fractions of a cent. For the CBA it is even more important because in his battle with inflation in recent times is not too smooth.

In the review, the Central Bank acknowledges that inflation dynamics have worsened, “Annual inflation “stuck” in the range of 7.1–7.5 percent in March. The reduction in inflationary pressures and inflation expectations stopped”. The same June, allowing the Central Bank to declare the “end of recession”, became a month when the actual dynamics of prices deviated upwards from the target trajectory, leading to an annual total growth of 5.5%.

It’s not a paradox. For CB this is an additional argument in favor of the fact that the economy comes to life. This means that the Central Bank in the second half is unlikely to take significant easing of its monetary policy.

Related — related, recession — recession, but the current policy is paramount. And who’s to say that the Central Bank this alone?

July judged strictly

July, opening the second half, declared itself as about the month of change. They happened, for example, in fiscal policy. Here the vector — tightening and cost containment. Main budget summary July — to keep the budget deficit on its laurels for the first half of the level. This level is impressive — 1.5 trillion rubles.

Natalia Orlova, chief economist at Alfa Bank, estimated that if the first half of the budget cuts on an annual basis was only 0.5% in July, spending decreased again by 4%. I think the government is unlikely in the context of a large election cycle to maintain the July pace of spending cuts, but from the point of view of the dynamics of GDP reduction in government spending — minus. Such are the swings of the economy: to limit the budget deficit government spending should be reduced, but if they reduce the phase when the economy is falling or teetering between stagnation and recession, it is likely to fall even faster.

The main macroeconomic result of the July decline in industrial production. Data for industrial development in July was frankly disappointed. If in June, the annual industry growth was 1.7% in July, according to Rosstat, the overall rate has not increased, but decreased by 0.3%.

Importantly, anteriores has become the manufacturing industry. In the company “VTB Capital” noted: “the Result is mainly due to the slowdown of the annual growth in the manufacturing sector from 1.6% in June to minus 1.5% (below zero for the first time since March, 2016) in July, while the monthly growth of industrial production, cleared of seasonal and calendar factors, was minus 0.9 percent (which is the weakest level since April 2015, when the fall amounted to -1,4%)”.

How can you not go back to the “end of recession”, declared CB! He pinned the main hopes on the growth of it manufacturing industries. And, it seems, miscalculated. Although we will not repeat its first and most obvious mistakes: monthly indicators are insufficient for serious macroeconomic insights.


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