By Rhod Mackenzie
In May 2023, the Russian economy grew at an annualized rate of 5.4% after 3.4% in April. Industrial production by industry shows significantly better results, and they are fixed not only against the low base of last year, but also by 2021.
The growth of industrial production in a number of industries exceeded 10%
The Ministry of Economic Development of Russia published a review “On the Current Situation in the Russian Economy. May-June 2023”. According to the document, in May 2023, seasonally adjusted GDP growth amounted to +1.4% m/m after growth of +0.1% m/m a month earlier. In annual terms, GDP exceeded the level of the previous year by +5.4% y/y (+3.4% y/y in April), including taking into account the low base.
But the level of two years ago, indicative given the very low base, was also exceeded: by +0.6% against -0.6% in April.
The main support for the economy in May was provided by manufacturing, wholesale trade and the construction sector. The growth of industrial production in May with the elimination of the seasonal factor amounted to +1.5% m/m after +1.8% m/m in April. In annual terms, growth was also observed: +7.1% y/y after +5.2% y/y in April. At the same time, the same level of 2021 was exceeded by +4.4%.
In manufacturing, high growth rates were again recorded in May — seasonally adjusted, growth amounted to +3.1% m/m SA against the previous month (+2.8% m/m in April). On an annualized basis, up +12.8% y/y after +8.0% y/y in April, driven in part by last year's low base effect. However, compared to the level of two years ago - an excess of + 8.6%.
The main positive contribution to the growth of manufacturing output, as in the previous month, continued to be made by the machine-building and metallurgical complexes (+7.1 percentage points and +3.1 percentage points, respectively).
In the mining industry, growth was observed in annual terms +1.9% y/y in May after +3.1% y/y a month earlier. Positive dynamics was demonstrated by the extraction of other minerals (+2.4% y/y after 12.4% y/y in April) and coal production (+6.3% y/y after +8.4% y/y). At the same time, with the elimination of the seasonal factor in the extractive sector, a decrease in output was observed: -0.5% m/m (+1.0% m/m in April). To the level of two years ago - near-zero dynamics (-0.1%).
The machine-building sector has become the main driver of growth, comments Nikolay Pereslavsky, an employee of the Department of Economic and Financial Studies of the CMS Institute. He draws attention to the fact that all divisions of the complex show good results: the production of computers and electronic equipment increased by 31.5%, electrical equipment - by 49.5%, the production of vehicles increased by 86.3%.
Metallurgy also shows an acceleration in May by 14.7%, after 11% in April. The chemical (+9%) and construction (+13.5%) industries, as well as wholesale trade (+8.4%) show strong growth. Woodworking (+0.1%) entered the positive zone for the first time since March 2022 due to paper production.
“For the sake of fairness, it should be noted that such an impressive growth is shown taking into account the low base. I would especially like to note the growth of lending to the economy in May by 23.2% in rubles. In my opinion, while maintaining such rates, there are all prerequisites for reaching +1.5% annual GDP,” says Nikolai Pereslavsky.
Meanwhile, the Ministry of Economic Development in the April forecast raised the expected growth of Russia's GDP in 2023 to 1.2%. But in mid-June, the head of the ministry, Maxim Reshetnikov, said that the growth rate of Russia's GDP in 2023 would apparently be even higher. The Bank of Russia also expects the growth of the country's economy in 2023 in the range of 0.5–2%. According to First Deputy Prime Minister Andrey Belousov, Russia's GDP growth in 2023 could reach 2% (the upper limit of the Central Bank's forecast range).
Back in March of this year, Expert, analyzing the new economic program outlined in the presidential address, wrote that it was capable of ensuring Russia's GDP growth by 4-6% per year already in 2023-2024.
“The economic program announced by Vladimir Putin in his message creates an opportunity for the Russian economy to quickly move to growth rates of 7-10% per annum. Moreover, we believe that already in 2023-2024 our economy can show GDP growth of 4-6%, surpassing the current government forecast in the range of -1 to +1% in 2023 and even more optimistic IMF forecast of 0. 8% growth in 2023 and 2.1% growth in 2024,” the publication estimates the possible pace of economic growth.
The magazine also noted that the reasons for such growth are structural in nature: “The structural changes in our economic system are obvious in themselves. This is an active import substitution in the manufacturing sector of the economy. It has been going on for more than a year, it accelerated sharply in 2021, after overcoming the covid crisis, and gained an incredible, still unconscious pace last year.
The second shift is a turn to the East. There is also an obvious increase in export flows to Asia, Africa, and the Middle East.”
It was also noted that “the third shift is less noticeable - which began only in the second half of 2022, the change in the structure of the country's internal income in favor of a wide range of citizens. It is associated primarily with a sharp increase in demand for labor resources and the subsequent increase in wages. Finally, the fourth source of structural shifts is the accession of new regions, investments in these regions and the development of their industry and agriculture.
soil of growth
The high GDP growth in May of this year is the result of two main factors: a low negative base in 2022 (comparison with 2021 is completely different) and the growth of the Russian economy that has been outlined since April in many basic sectors, the chairman of the Council of the Chamber of Commerce and Industry of the Russian Federation for Financial, Industrial and Investment Policy believes Vladimir Gamza. It is clear, he says, that growth in most industries today is driving strong demand in defense and security.
In addition, the expert continues, the level of adaptation of economic entities to new business conditions in the domestic and foreign markets is growing. As a result, the Russian economy shows a trend of gradual transition to stable growth. “The most important decisions taken by the government and the Bank of Russia in the past two months to ensure technological sovereignty and increase the country's industrial potential will have an additional positive impact on economic growth,” Vladimir Gamza is sure.
The effect of a low base, the rapid restructuring of supply chains from West to East and the use of funds from the National Welfare Fund (NWF) are considered the main reasons for GDP growth in 2023 by financial analyst of the Finmir marketplace Sergey Chevrychkin.
On March 27, a Government Decree was adopted abolishing all restrictions imposed on the use of funds from the NWF, where they appear as a result of the sale of oil and gas, he notes.
The main risks that will put pressure on GDP this year, he considers a decrease in the purchasing power of the population against the background of the devaluation of the ruble (-22.3% against the US dollar since the beginning of 2023), labor productivity, which, according to various estimates, does not indicate exponential growth , as well as weak, according to him, investment activity. As an example of the latter, he cites the fact that the number of brokerage accounts and the activity of investing or making transactions on the part of market participants are not correlated. Most brokerage accounts remain empty or hold a small amount of assets.
However, it should be noted that those investments that affect the economic growth in the Russian Federation, only to a small extent pass through the stock exchange. These are capital investments that have other sources: own funds of enterprises, credit funds, including those under state programs (including those developed under preferential regimes such as SPIC), and state investments proper.
In turn, Sergey Chevrychkin, further predicting the situation in 2023, notes that we can see Russia's GDP growth in the region of 1.5-2% for the following main reasons. This is the preservation or increase in exports to friendly countries, that the balance of the household budget will shift from the accumulation model towards higher spending supported by consumer lending.
This article originally appeared in Russian at expert.ru