What Is The Best Stimulus Policy?

The slowdown continues against the backdrop of a sluggish international environment and practically flat oil prices. While inflation accelerates, unemployment is near a record low. Under these conditions, choosing an economic policy is no easy matter. To increase Russia’s growth potential, the economy is clearly in need of structural reforms: some are underway but will take time before they begin to pay off. Although a stimulus plan raises fears of overheating, investment needs to be stimulated in order to boost Russia’s growth potential.

The slowdown continues
The Russian economy continues to slow, extending a movement that began in H2 2012. Growth was only 1.6% year-on-year in Q1 2013, after a lacklustre performance in late 2012 (+2.1% y/y in Q4). The Ministry of Economy estimates growth at 1.8% y/y in the first 5 months of the year. The industrial performance is still disappointing with a year-on-year contraction in May and growth of only 0.2% in the first 5 months of 2013.

Consumption is resilient. In the first 5 months of 2013, retail sales rose 3.8% y/y while service sector revenues increased 2.3%. This is nonetheless a slowdown compared to the same period in 2012 (+7.6% and +4.4%, respectively). The slowdown is partly due to the decline in real revenue growth. Real revenues are still rising faster than consumption, generating a regular inflow of savings. Investment contracted 0.2% y/y in the first 5 months of 2013. This trend is particularly alarming since the production capacity utilisation rate, at 65% in May 2013, is at its maximum, and is even higher than in 200. This means that the period of growth without investment – which prevailed in the 2000s -- has clearly gone.

■ Surging inflation and record low unemployment
The low point of inflation is clearly behind us. Consumer prices rose 7.4% y/y in May (after bottoming out at 3.7% in May 2012). Yet core inflation remains flat at 6% in 2013. Price increases are fuelled by the seasonal increase in food prices and by tariffs on natural monopolies (+11% y/y in the first 5 months of 2013).

Despite the stark slowdown and stagnation in industry, the economy continues to create jobs. The number of jobs reached 71.1m in April 2013, 100,000 more than in April 2012. The unemployment rate fell to 5.2% in May 2013, close to the all-time low of 5% reported in September 2012, even though the active population continues to grow.

■ Which stimulus?
This is a legitimate question since the economy is close to stagnation, which is something that has never been seen before in recent Russian economic history. The international environment cannot be considered as a growth engine, like it was before the 2008 financial crisis. Worse, faltering growth could trigger an outbreak of non-negligible social risks.

BY Anna DORBEC

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