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The Russian economy is feeling better with the strengthening of the ruble and worse when it is weakening, which indicates its weak competitiveness
Optimistic assessments of the economic situation flooded the information space in the last two weeks. That in some sectors there has been growth, said President Putin, analysts said the growth index of business activity PMI in manufacturing industry, domestic demand growth continued for two months, and that inflation is moving briskly to target. In the recent review of development Centre States that SOYBEANS (combined index) that indicates the likely future path of the economy, not only continued growth, but also went into positive territory for the first time in 2013.
Some sense of stability — that the worst is over and significant short-term hazards are not visible, — the economy is clearly present. Fear of macroeconomic instability has receded. But to live with relatively low oil prices (about $50), it is possible. And it’s invigorating.
“Stick in the mud”
However, the latest data of Rosstat in September slightly spoil the picture. Industrial production again slightly down (-0.8%) to the previous September after a small plus in August (plus 0.7%). These swings or saw, swings from a small positive and small negative and back again, analysts of the Bank of Russia has called the “new seasonality” (get-model “stick in the mud”). If in August, plus has provided the manufacturing industry, the September minus, on the contrary, would have been even greater if not for the growth of the mining sector of 2.1%. The manufacturing industry, by contrast, gave the worst result for all of 2016 — minus 1.6% compared to September last year.
For the manufacturing sectors the picture is. Continues, although looks fade, the growth in the consumer sector (food, textile and clothing industry), is clearly weaker than in the early summer, but growth continues in wood processing, chemical industry, rubber and plastic. Conversely, the continuing sluggish decline in the most significant sectors of the so-called intermediate demand — refining and metallurgy. In the sector of machinery and equipment is the same picture as in the consumer sector: the growth is there (plus 4.6% last September), but significantly lower than in early summer.
This thing looks, at first glance, quite promising: a large group of industries rises, that is they extend its share in the domestic market. We can conclude that some market substitution takes place. You’ve got to understand that when we talk about import substitution, it is necessary to distinguish the government’s “import substitution policy” (subsidies, tariffs) and market import substitution, which is driven by the change in the attitude of internal and external prices.
The exchange rate effect
But in fact, the summer improvement in the economy for the second consecutive year in a row. Last year it began a little later, in July of this year — a little earlier in the spring, and looks longer, but less intense. The September result of industry, and generally poor (negative 0.3% in August), it looks so bad in comparison with last September, which was the peak of the first bounce. It’s September like its decaying phase.
In General, the phenomenon of the summer ascents of 2015 and 2016, especially in the manufacturing industry can be linked to another cycle — the weakening of the ruble at the beginning and the consolidation in the middle of the year (in turn, this cycle, of course, associated with the dynamics of oil prices). In may 2015 the ruble in comparison with January—February has appreciated by 23%, in 2016, the strengthening from February to July was 17%. In both cases, with some lag began improvement in production.
The fact that the strengthening of the ruble leads to a reduction in imported components of producer costs: the ruble cost of imported components, equipment, and materials in the cost of contracts. If the share of imports in the product you have, for example, 35%, the strengthening of the ruble by 20% leads to a reduction of ruble costs by 7%. The producers feel freer and more confident, can afford price action and some expansion of production. Especially when they expect for the New year, as it was in 2014 and 2015, the ruble will fall again. Characteristically, the growth of prices for nonfood consumer goods (where the import component in the cost plays an especially prominent role) in the first four months of this year was 2.9%, and for the next four months (when the ruble strengthened) — only 1.7%.
One evidence of the assumptions about the incentive role of strengthening of rouble can serve as the explosive growth in the production of home appliances (July—September, on average 30% per month of the previous year), where the share of imports in production are particularly high. We can assume that this growth was driven both by a surge in consumer lending (even caused the concern of the Central Bank) and the reduction in the cost of imported components. Gets explanation and noted by analysts of the Bank of Russia the growth of investment imports. These imports might not be as much a harbinger of future growth as a reaction to a General improvement in market conditions for import-dependent sectors and the consequence of pent-up demand for equipment upgrades.
In this case, however, the fact that the Russian economy is feeling better with the strengthening of the ruble and worse when it is weak, evidence not of import substitution but rather that the economy remains in the old paradigm. The decline in domestic producers ‘ costs (with the weakening of the ruble) gives a smaller win than the increase in dollar purchasing power of consumers when it strengthened.
This, in turn, indicates the weakness of the export sector and that the market import substitution, on the scale of the devaluation, which took place, together with other economic conditions (availability of credit, the business and investment climate) works very poorly. And can not cover the negative factor of compression of the domestic market, despite low inflation. By the way, characteristic that August and September saw a significant increase in imports. This is also a sign of the old economic paradigm.
Out of the swamp by the hair
In General, it’s bad news, which again brings us to one of the main problems of the Russian economy — “scissors competitiveness.” Our consumption was transformed under the influence of rapid growth in real incomes and strengthening of the real exchange rate, and the level of development of production and investment activity absolutely had not kept pace with these changes. As a result, the production acquired partly an assemblage character. Now it turns out that we can’t reduce manufacturers ‘ costs due to the weakening of the ruble. A strong ruble can’t afford for a number of reasons, in particular because of the inevitable expansion of imports from developing countries because of the strong ruble increases the burden on the budget in the conditions of shrinking export revenues (as told to Vladimir Putin, we will get less rubles per unit of exports).
By the way, about the budget. Its role in maintaining the dynamics of production, particularly in machine building industry is very high. Intensive production of buses, electric locomotives, railcars, agricultural equipment (also subsidized from the budget) and hidden between the defense industry is an important part of its current sustainability. The budget deficit this year is significantly higher than last year, but this might be the last year when a shortage of more or less getting away with it.
If the summer rebound in the manufacturing sector are related to exchange rate fluctuations, they are not evidence of economic adaptation to the new macroeconomic equilibrium, but rather an indication that the transition to a new track didn’t happen. And in this case, these oscillations are somewhat similar to the efforts of Baron Munchausen, trying to pull himself out of the swamp by the hair.
In any case, and the continuing decline in retail trade (real private consumption) of 5.5% to the lows of last year, and the continued decline of investments in the second quarter of 4.5% for the second quarter of 2015 indicate that the major signs of a recession while there. The negative trend in investment activity has continued since the second half of 2013 and reflects the fundamental problems of the economy, especially the low profitability of investment, so savagely exacerbated by the costs of geopolitics. This is the most profitability is the main issue of the economy and economic policy.
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