Russia’s economy continues to overheat. According to the Central Bank, rapid growth of gross national product persisted in the first quarter of 2024, potentially creating a supply‒demand gap of 1.5% to 3% of GDP. Invest Foresight asked Alexander Abramov, Head of the Laboratory for Analysis of Institutions and Financial Markets at the Russian Presidential Academy of National Economy and Public Administration, how dangerous this trend is and what can be done to cool it down.
– So, the Russian economy continued to grow in the first quarter of 2024. Is this a good thing?
– Of course, a growing GDP is a good thing. The question is whether this growth is sustainable. When, as in the Central Bank’s scenario, rapid economic growth is accompanied by a gap between the demand for goods and the actual output of the economy, accelerating inflation can become a major problem before long.
— Why can this happen?
— The Central Bank states that the supply of goods is limited due to the specifics of production structure. There is a shortage of workforce and labor is growing in price because of the inflation spiral. Therefore, the regulatory body believes that inevitably, the amount of cash available to people will become dangerous for the low supply.
— The IMF has also raised the economic growth forecast for the Russian economy in 2024 to 3.2%. Is this estimate fair? Did the world actually recognize our growth rate?
— The fact is, the International Monetary Fund has improved the forecast because of how much has been actually achieved. If you remember, the IMF still predicts a rather modest GDP growth for Russia in 2025 at 1.8%. Yes, the Russian economy has grown, thanks to very specific stimulation measures. Also, if you remember, the IMF agreed with the Russian Central Bank on the economy being overheated.
— Does the gap of 1.5–3% of GDP between the demand and supply actually indicate an overheat?
— First of all, there is no clear indication of what the GDP growth should be to be qualified as an economic overheat. It depends on multiple models that the Central Bank uses. By the way, theoretically, the overheat can still happen if there is a so-called negative growth.
It is not about the percentage. We need to look closer at how the economy operates, whether wages grow and to what extent the economic growth matches the supply of goods. This is the main problem.
— What is the downside of an overheated economy?
— Overheating is indeed dangerous. An overheated economy is fraught with rampant inflation that will take far tougher measures to address than today. This rampant inflation will cause a far more serious economic decline than we can predict.
— Can and should it be avoided?
— I believe now it is better to not rock the boat around the economic developments.
In general, all expert opinions considered, the current developments are rather logical and expected.
Yes, the key rate is high but the economy is growing and earning money. I would watch closely what happens after May 2024. It is my belief that, due to the high base effect and price hikes since April 2023, the inflation rate will start to go down. Then the Central Bank will have motivation and internal justification to curb the key rate and gradually monitor the inflation, the economic growth and other macroeconomic indicators.
— When should we start looking?
— I would wait until June. In the long run, it is exactly what the Central Bank expects to see. Taking the edge off monetary policy now means admitting that the Central Bank has been wrong for the past six months. But oversimplifying is not the strategy to choose either. The Central Bank is a mega regulatory body with a qualified team that understands risks and knows what it is doing.
I am convinced they are taking the right approach.
In order to break the logjam today, you need an external stimulus like a significant inflation slowdown. I think the inflation will slow down and enter the decline stage in April. Between May and August, I expect the high base effect will work in favor of slowing down consumer price hikes.