How far will Russia’s GDP fall by the end of this year? What happens in the fourth quarter of 2015 will be a critical early indicator of what to expect in 2016.
The fall in GDP has been steep in 2015. GDP fell sharply in the first quarter by -2.2% year-on-year, then dropped sharply again in the second Quarter to -4.6%. It then stabilized in the third Quarter at a slightly improved -4.1%, encouraging some commentators, including President Vladimir Putin, to declare that the economy had bottomed out.
The Russian economy could, indeed, stabilize on the assumption that the impacts of lower oil prices and economic sanctions have run their course. But is that the case and can Russia, as its Finance Minister Anton Siluanov believes, return to positive growth in 2016?
The IMF now expects a decline in Russian GDP in 2015 of -3.8%.(http://www.imf.org/external/np/sec/pr/2015/pr15533.htm), a number that agrees with the World Bank number in September. Since the declines in GDP for the first, second and third quarters of 2015 are known, it is simple math to calculate that the IMF and World Bank expect a decline of -4.4% in the fourth quarter, somewhat worse than in the third quarter. If the IMF and World Bank are correct, the fourth quarter of 2015 will not signal a bottoming out or a turnaround in the economy as yet.
Nevertheless, the IMF and the World Bank project Russian GDP to decline by only -0.6% in 2016, a substantial improvement over 2015 and, by implication, a possible very modest return to growth during the year. However, given the current rate of decline, the upturn in 2016 will have to be dramatic to average out to -0.6% for the year.
What changes between December 2015 and January 2016 to change Russia’s growth prospects? The answer is, nothing.
The IMF appears to expect a turnaround in 2016 based on a modest recovery in the price of oil and an increase in non-energy manufacturing exports due to increased competitiveness from a cheaper ruble. This will improve Russia’s current account even if gross domestic investment and consumption are essentially unchanged from 2015(http://www.imf.org/external/pubs/ft/scr/2015/cr15211.pdf).
But there are reasons to doubt such a scenario. Crucially, the IMF numbers are based on an average oil price of US$61.50/barrel in 2015 and US$67.20/barrel in 2016. However, the average price of oil in 2015 has been trending substantially below the IMF’s figure, around US$54/barrel(http://www.eia.gov/forecasts/steo/). Prospects for an oil price recovery in 2016 look equally dim since the most recent trend in price has been steadily downward. In addition, the increase in manufacturing has yet to materialize(Russian manufacturing: no lift-off http://on.ft.com/1NEHTeE via fastFT). At the same time, investment and consumption are showing no signs of life. Consumption, in particular, will continue to fall as public sector spending falls (including public sector wages and pensions, which make up a large share of national income) and the poverty rate rises.
Russia enters 2016 wrong-footed for recovery. The projected steep fall in fourth quarter 2015 GDP suggests that the decline will continue into the first part of 2016 since most economic drivers are still trending downward. The decline in the first half of 2016 could be as much as 4-5%, similar to its performance in the second half of 2015.
That means that growth in the second half of 2016 would have to be 1-2% to attain the IMF and World Bank projection for the year. A turnaround of that magnitude in such a short time is highly unlikely without a turnaround in investment and consumption. More likely is a continued decline or, finally, a bottoming out in the middle of the year as the economy finds a new equilibrium with lower investment, lower consumption and lower growth, followed by near zero growth for the rest of the year. This suggests that GDP in 2016 is likely to fall by at least 1-2% if Russia can stabilize the economy by mid-year. A return to a very tepid positive growth in the second half of the year is still possible, but may not occur until 2017.
It is also possible that Russia may surprise even more on the downside due to its unique circumstances, including an astonishing level of corruption and bureaucratic interference that will prevent the economy from stabilizing at a new equilibrium point based on pure economic factors. Also, the burden of heavy military spending and capital flight may limit growth well below the economy’s potential. With such fragility built into the economy, the catalyst for a downside surprise may be further erosion in the price of oil (and gas) that triggers a collapse in economic activity. The OPEC meeting this week appears to have kicked the bottom out of oil price, which is close to its six-year lows and falling.
There is also a high risk that worse than expected economic performance in 2016 may result in poor policy choices. Russia may be sorely tempted to print money to cover the shortfall in public sector expenditures as its Reserve Fund is depleted next year, or in a vain attempt to stimulate consumption, putting its inflation target at risk, rather than suffer a further fall in GDP and steadily increasing poverty. The Russian people will see their suffering increase…unless…unless Putin is tempted to initiate another provocation to deflect attention from Russia’s worsening economic condition. Then, the risk of economic discontinuity will be immeasurably increased.
DirkMattheisen.blogspot.com
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