15 May 2023 11:21

European Commission improves Russian GDP outlook, now expects 0.9% decline in 2023

MOSCOW. May 15 (Interfax) - The European Commission has improved its outlook for the Russian economy for 2023 and now expects GDP to contract by just 0.9%, compared with a drop of 3.2% in its previous forecast.

The Russian economy will grow 1.3% in 2024, EC analysts think.

The European Commission believes that nominal wage growth in Russia will outpace inflation in 2023, but consumers will continue to face pressure due to geopolitical uncertainty, with consumer spending falling by 0.5%.

Public funds "are expected to continue supporting new domestic production capacities to back import substitution policies, additional infrastructure to facilitate a trade shift towards the east, and military production," the document said. Public spending is expected to grow by 2.6%, while business investment is expected to decline by 1.2%.

"The EU's diversification of gas supplies away from Russia coupled with its embargo on seaborne oil and refined oil products, are expected to hinder export recovery as Russia is unlikely to fully replace lost markets. Imports are projected to recover only gradually amid ongoing sanctions and a weakening ruble reflecting deterioration of the current account surplus on the back of easing energy price," the report said.

The EC expects Russian exports to decrease by 2.5% and imports to grow by 2.8% in 2023. In 2024, the figures are expected to grow by 1.7% and 2.9%, respectively.

As the economy gradually adjusts to the sanctions, a modest recovery of 1.3% is projected in 2024. However, international isolation and an economic pivot "are expected to channel resources to less productive sectors, weighing negatively on future potential output."

The balance of risks to the growth outlook is deemed to be tilted to the downside, the report said.

"Significant negative risks stem from a possible new wave of mobilisation, which could further exacerbate pressures on the labour market, and stronger enforcement of sanctions against Russia," the EC experts said.

Inflation in Russia will slow to 6.4% in 2023 from 13.7% in 2022, the index will fall to 4.6% in 2024, the EC said. At the same time, high inflationary expectations and inflation risks will limit the possibilities for softening monetary policy, analysts said.

The Russian budget deficit this year is expected to be about 3% of GDP, falling to 2.5% in 2024. Part of the deficit will be covered by the National Welfare Fund, the EC said. The ratio of public debt to GDP will reach 17% by 2024 as compared to 14.75% in 2022.