18 May 2022 11:13

Russian Econ Ministry sees GDP shrinking 7.8% in 2022 and 0.7% in 2023, 3.2% growth in 2024

MOSCOW. May 18 (Interfax) - Russia's Economic Development Ministry has agreed on the main scenario parameters for the macroeconomic forecast for 2022-2025 with the Finance Ministry and submitted them to the government, a ministry spokesman told reporters.

He said these scenario conditions have already been discussed by the government commission for increasing the stability of the Russian economy and are expected to be forwarded soon to the regions and other government agencies as part of work on the revised budget for 2022 and preparation of the budget and financial plan for 2023-2025.

The Economic Development Ministry's baseline forecast sees GDP contracting by 7.8% in 2022, which is more optimistic than the Central Bank of Russia's (CBR) forecast for a drop of 8-10%. The ministry also expects GDP to shrink by 0.7% in 2023, while the CBR expects a decline of zero to 3%.

The ministry forecast that the economy will then grow by 3.2% in 2024 and 2.6% in 2025. The CBR forecast growth of 2.5-3.5% in 2024.

The ministry expects the economy to hit bottom in the third quarter of 2022, with a slow recovery (seasonally adjusted) beginning in the fourth quarter.

"We believe that the peak of the decline will come in the third quarter of 2022. Initially in March we expected that the main drop would come in the second quarter, but now we see that the trajectory of the decline is more gradual. As a result, we shifted the beginning of the recovery from the third quarter to the fourth quarter. GDP in the baseline scenario will start to slowly recover beginning in the fourth quarter of 2022, but growth will remain negative in 2023," the ministry spokesman said.

"After a period of high volatility, the situation in the economy stabilized. The ruble's exchange rate strengthened, inflation slowed significantly - 6.4% in annual terms in the first week of May. By our estimates, the slowdown continued in the second week. In the real sector, a collapse in production and explosive growth of unemployment did not happen. We managed to avoid a shortage of goods - the wave of panic buying subsided. On the whole, the Russian economy demonstrated resilience," the spokesman said.

"But of course, the main difficulties in the economy remain - supply chain disruptions and the need to reconfigure production, a significant decrease in imports," he said.

"In the next few months the situation in the economy will be determined foremost by the foreign trade balance. For the first time in modern history we're entering a recession with fairly high world prices for resource commodities," he said.

The ministry's baseline scenario assumes that average annual prices for Urals crude will be $80.10 per barrel in 2022, $71.40 in 2023, $66 in 2024 and $61.20 in 2025.

"In the baseline scenario we're factoring in an Urals oil price of $78 per barrel on average to the end of the year and $80 on average for the year. Prices for other resource commodities will also remain at high levels," the spokesman said.

"We expect a gradual decrease in prices for Urals oil as global growth slows and the world energy market adapts to the new conditions," he said.

"We're factoring in fairly large discounts [on the price of Urals crude compared to Brent]. Nonetheless, we expect them to decrease and see strong potential there. The forecast for oil is fairly conservative," he said.

Visible exports will fall 14% in real terms in 2022, with oil and gas exports dropping 8% and non-oil and gas exports tumbling 20%, the ministry forecast. However, in nominal terms exports are expected to fall by only 2.3% thanks to high export prices.

The ministry expects Russian exports to total $482.4 billion in 2022, but then drop to $451.6 billion in 2023, $450.4 billion in 2024 and $449.3 billion in 2025.

Visible imports are expected to drop 27% in real terms "due to the need to reconfigure logistics and the contraction of domestic demand."

"The nominal decrease in imports is smaller, 17%, taking into account global inflation and the increase in transport and logistics mark-ups. We are factoring into the forecast the implementation of a whole set of measures to support imports, including the elimination of import duties on a number of goods, parallel imports and other measures," the spokesman said.

The ministry expects Russian imports to drop to $251.9 billion in 2022 but then grow to $275 billion in 2023, $299.5 billion in 2024 and $320.8 billion in 2025.

The trade surplus is expected to grow to $230 billion in 2022 and the current account surplus is forecast to reach a record high of $191 billion.

The scenario conditions for the forecast to 2025 assume that sanctions against Russia will remain in place and even tighten somewhat, the ministry spokesman said.

"We're proceeding from what we have now [in terms of sanctions], from the fact that in general we expect some tightening [of sanctions], from how all this will be implemented. Because there's a very big question regarding implementation of these decisions," he said.

"The main contribution to the decline of GDP this year will be made by consumption - retail sales will drop by 8.7% and paid services will fall by 7.9%, according to the forecast. The factors [for this] are a 6.8% decrease in real disposable incomes, growth of unemployment to 6.7%, growth of the savings rate to 6.7% from 5% and stalled consumer lending," the spokesman said.

He also said that macroeconomic data for April and May indicate that there are risks of a cyclical crisis in Russia.

"Unfortunately, at this point for April-May we see by the figures that risks of a cyclical crisis developing nonetheless exist. We see weak money supply growth - insufficient to reach target indicators, this is the main problem for us. But subsequently it's already a matter of adapting to the new conditions, transitioning to recovery growth at the end of this year. We see that the processes of adaptation have begun in the economy, but obviously this will take a different amount of time in different areas," the spokesman said.

"Investment, according to the forecast, will fall by 19.4% in 2022 due to uncertainty and disruptions in equipment supplies," he said.

Net exports will make a positive contribution of about 1 percentage point due to the steeper decline of visible imports (by 27%) compared to exports (by 14%), he said.

"As for the medium-term horizon, here we're taking into account the following factors: the continuation of restrictions on imports, both due to sanctions and due to the 'voluntary refusal' of foreign partners to work with Russia; contraction of export markets and limited possibilities for redirecting shipments; and restructuring of the economy, foremost production and logistics chains," the spokesman said regarding expectations for the next few years.

"For 2023, we expect GDP to shrink by 0.7%. Here we're also taking into account the high base of the first quarter of 2022 - growth of 3.7%. Thus, the supply crisis will turn out to be protracted - the decline will be slower but deep. We expect the main recovery growth in 2024 and 2025 - by 3.2% and 2.6%, respectively. The foundation of the economy's recovery will be growth of consumer demand. Consumption of goods and services, real wages and disposable household incomes in 2025 will be 1-2% higher than the levels of 2021," he said.

The ministry expects unemployment to return to the pre-crisis level of 4.5% by 2025.

"Investment will also recover, but will not completely regain the losses," as it is expected to be down 7% in 2025 compared to 2021, he said. "Here we're taking into account technology restrictions and the curtailment of major export-oriented projects that will be partly replaced by smaller ones in terms of the amounts of investment in import-substituting production."

"The contribution of net exports to real GDP growth becomes negative in 2023-2025 - minus 0.6, minus 0.3 and minus 0.1 percentage points - due to the faster recovery growth of imports," the spokesman said.

He also said that the "baseline scenario factors in proactive economic policy." Specifically, the ministry anticipates the "effective implementation of the whole set of measures to support the economy, including subsidized lending programs; active reduction of the key rate by the Bank of Russia along with inflation; and a sufficient level of budget spending to support domestic demand - the ministry expects neutral-loose, closer to loose budget policy. The budget has the resources for this," the spokesman said.

"These measures will make it possible to not add a cyclical crisis to a structural one. The economy will be able to adapt to the new conditions and already transition to recovery growth at the end of this year. Without an adequate economic policy response, on the contrary, we risk getting a full-scale demand crisis and the economy slipping into a bad imbalance with low inflation, strong exchange rate and high unemployment," the spokesman said.