Why did Russia's economy grow by 4.6% in January?

By Rhod Mackenzie

In January 2024, the Russian economy experienced an unexpected acceleration, with annual GDP growth reaching 4.6%, up from 4.4% in December. The manufacturing sector played a significant role in supporting the GDP, despite increasing sanctions pressure and moderate hydrocarbon prices. It remains uncertain how long this recovery will last, but it demonstrates the Russian economy's resilience. Furthermore, accelerating growth in the face of extremely tight monetary policy may raise concerns about potential overheating of the economy.

It is worth noting that GDP increased by 3.6% at the end of 2023, marking one of the best results in the past decade. Additionally, the growth rate accelerated towards the end of the year. In January-September 2023, the growth rate amounted to 2.8%. This increase can be attributed to the low base effect, but it should have weakened by January.

The industry sector played a significant role in this growth. According to the Ministry of Economy's review, production growth accelerated to 4.6% year-on-year in January, surpassing not only December's 2.7% year-on-year growth but also November 2023's 4.5% year-on-year growth. Compared to two years ago, growth was 1.6% in January, up from 0.4% in December last year. The increase in dynamics is mainly due to the recovery of growth rates in the manufacturing industry, which showed an acceleration in development to 7.5% in January, up from 5.1% in December.

The increase in dynamics is mainly due to the recovery of growth rates in the manufacturing industry, which showed an acceleration in development to 7.5% in January, up from 5.1% in December. This was mainly due to industries focused on domestic demand. Growth was 4.6% in January compared to two years ago, up from 1.9% a month earlier. In January, the mechanical engineering complex, along with the metallurgical and food industries, made the greatest positive contribution to the dynamics of manufacturing. Together, they accounted for 89% of the total output growth.
The positive trend in consumer demand continues. In January, the total turnover of retail trade, public catering, and paid services to the population increased by 8% in real terms. Although the pace slowed down slightly compared to December's 9.1%, direct trade grew even more, by over 10%, while paid services grew slightly less.
The acceleration is a positive factor for economic development, indicating stability in the Russian economy. However, it is uncertain whether this effect will be sustained. Considering the high capacity utilization, low unemployment, and high inflation, there is a suspicion of significant overheating in the economy. Even the exceptionally high key rate of 16% in nominal and about 8.5% in real (minus inflation) expression has not been able to curb it.

It is worth noting that GDP is growing rapidly despite a relatively moderate fiscal impulse. In 2023, the budget deficit was 1.9% of GDP, and in January, it was only 0.2%.

This suggests a strong inertia force.
According to Anton Tabakh, the chief economist of the Expert RA rating agency, it is premature to draw conclusions based on the published statistics.

According to him, the slow rate of change in GDP is due to inertia and the fact that monthly GDP data is not very representative. This means that January's GDP is determined by spending and rates from the previous summer or autumn. Despite this, growth remains strong.

Olga Belenkaya, head of the macroeconomic analysis department at Finam Financial Group, notes that when assessing economic growth acceleration or slowdown, current growth indicators relative to the previous period, taking into account the seasonal factor, are more important than the annual rate. The Ministry of Economic Development previously published monthly estimates, but the latest release does not include this information.

However, there are indications of a possible acceleration in economic growth in January due to the revival of consumer demand and the industrial sector. According to Rosstat, industrial production growth increased to 0.7% in January, taking into account seasonal and calendar factors, after stagnating since June of last year. Belenkaya comments on this development.
However, the economist added that TsMAKP (Center for Macroeconomic Analysis and Short-Term Forecasting), which monitors industrial production using its own methodology, has expressed doubts about this. According to the center’s methodology, there was a slight decline in output in January, by 0.3%, taking into account seasonality.
S&P Global data show an increase in business activity in the manufacturing industry in February, with all indicators above 50 indicating growth. The influx of new orders was the fastest since 2011, and growth in the overall manufacturing industry was the strongest since March 2019.

However, Olga Belenkaya agrees that tight monetary policy (MCP) has not yet had the desired effect. She stated that the budget impulse from last year is still affecting the economy, which has led to an increase in domestic demand. Furthermore, lending is slowing down at a slower rate than usual due to the implementation of large-scale preferential programs.

According to the expert, the most significant factor is likely the continued growth of household incomes. This can be attributed to increased wages in an overstrained labour market and budget payments.

High interest rates on deposits can increase the propensity to save. However, as noted by the Central Bank in a summary of the key rate discussion, consumer demand remains high and has only just begun to respond to tightening monetary conditions. While saving sentiment is increasing, there has been a significant slowdown in consumption.
Belenkaya notes that the peak of economic overheating occurred during the autumn months, and now it is decreasing. However, the nature of economic growth remains unclear.
In its summary of the key rate discussion, the Central Bank suggested for the first time that strong economic growth in 2023 could be associated not only with a 'positive output gap' but also with a significant increase in the potential of the economy. This increase could be due to improved labor efficiency, the introduction of new capacities, and the use of new technologies.

In our view, this change in the Central Bank's rhetoric is significant because although the potential of the economy is unobservable, the regulator assesses the degree of inflationary pressure stability by the deviation of economic activity from the potential. Therefore, if a re-evaluation of potential leads to a decrease in the estimate of the positive output gap, a strict monetary policy may not be necessary to slow down inflation towards the target, contrary to the Central Bank's belief.