RenCap, NES see "subdued" 3.5% Russian GDP growth in 2011
MOSCOW. Dec 9 (Interfax) - Renaissance Capital and the New Economic School say economic growth in Russia could remain at approximately 3.5% unless structural reforms get back under way.
The two said in a new monthly progress report on the Russian economy that 2011 "will be the first year that it will be possible to judge Russia's medium-term economic growth outlook in the post-crisis global environment."
"We believe it is likely to disappoint. According to our estimates, growth will remain subdued at around 3.5% in 2011. Against a backdrop of higher-than-expected commodity prices and strong global recovery, growth below 4% should be considered disappointing in our view."
"Growth in 2011 follows on from a relatively weak recovery in 2010. Incorporating the latest data into our LEI model, we estimate that growth will be 3.5% in 2010. Disappointing growth begs the question why, following 10 years from 1999-2008, when economic growth averaged 6.9%, has Russia moved onto a slow-growth path more like the economies in Europe and the US than the fast-growth countries in Asia and South America?"
"Our view is that without a renewed commitment to reform, Russia's long-term growth potential is no more than 3.5% per annum. Productivity gains will not permit growth much above this level without sparking inflation. The view is based on several factors. First, with GDP per head of $8,700, Russia is not a low-income economy such as China ($3,700) or India ($1,000). At higher income levels, incremental growth becomes more difficult. Second, its demographic profile is more like that of Europe and the US than most of the rest of the emerging world. Demographics will therefore tend to act as a drag on aggregate growth. Third, inefficient capital and labour markets limit the scope for rapid productivity gains by failing to allocate resources effectively. Finally, the large size of the government and the continued inefficiency of the bureaucracy places a substantial dead weight cost on the economy. "
"Without changing one or more of these parameters, we do not see how Russia can generate sustainable economic growth of much above 3.5% per annum in the medium term. If we are right, it will take several generations for Russian living standards to catch up with the West."
"This is not to say that there cannot be periods when growth runs at rates considerably above the long-term potential. It is one of the most serious deficiencies of the Russian economy that so much of economic policy is determined by global markets outside of the influence of Russian policy makers. As the world's largest natural resource exporter, Russia is a price-taker for some of the most important prices in its economy. With an open capital account and still weak domestic financial sector, Russia also finds it difficult to set its own interest rate environment. If commodity prices rise in 2011 and interest rates remain artificially low, then growth in 2011 can be higher than the 3.5% we suggest in this publication. But growth above the long-term trend will result in inflation and will tend to lead to an exaggerated and destabilising boom-bust cycle."
"Of course, it is possible, with the right reforms, for Russia to move onto a higher growth path. There are many structural deficiencies in Russia which, if removed, can result in a much better growth outlook. A commitment to governance, a more effective means of capital intermediation, less monopoly pricing power, a less overbearing bureaucracy, success in diversifying the economy away from oil, and effective investment in infrastructure can all lead to productivity gains and higher sustainable growth. Precisely because so many barriers remain to growth in Russia, it is possible to generate much faster growth by removing the barriers. Under the right circumstances there is no reason that Russia couldn't enjoy sustainable growth rates of 6% per annum rather than 3-4%."
"The flip side of lower growth in 2011 is likely to be less pressure on inflation. The CBR is targeting inflation of around 7% in 2011, which we believe is achievable. The CBR's new commitment to inflation targeting means that any signs of inflation much above 7% are likely to result in rising interest rates, which will induce an appreciation of the rouble, with a stabilising effect on aggregate demand."
In the new publication, Renaissance Capital and the New Economic School will monitor progress on a monthly basis of the Russian economy. They will look at economic and industrial production growth, inflation, trade and the budget in light of the government's policy agenda and global trends. By pooling together market-focused resources and academic expertise, RenCap and NES hope to be able to judge the effectiveness of policy designed to promote growth and spot early warning signs of economic activity that may not prove sustainable. The explicit aim is to avoid the complacency that put Russia and the markets at such a disadvantage when the economy shrank so surprisingly in late 2008, they say.