Igor Nikolaev: The world economy will likely avoid recession

The Central Bank of Russia has prepared three scenarios for the development of the Russian economy before 2026. Invest Foresight asked Igor Nikolaev, Director of FBK (Financial and Accounting Advisors) Strategic Analysis Institute, whether these scenarios may happen.

Igor Nikolaev, Director of FBK (Financial and Accounting Advisors) Strategic Analysis Institute, Vladimir Trefilov / RIA Novosti

In 2026, the Russian economy will get back on track of a balanced growth of 1.5%-2.5%. This is the basic scenario. Is this growth at all? Is it balanced?

– First of all, I want to give credit to Central Bank experts who came up with such wording. It does not seem negative, but it still needs to be interpreted.

The monetary policy review published in late July also had phrases like “the restorative phase of the economic growth is being concluded.” It means that there will be no restoration at this pace anymore.

A balanced growth, as I see it, should mean that it was made possible to balance the trade balance deficit and control the inflation rate. At the same time, the Central Bank says that the inflation rate will go back to 4% in 2024.

So yes, we can call 1.5%-2.5% a balanced growth. Macroeconomic indicators do not go off the rails and even show positive trends.

But can we call this growth?

– Yes, definitely. But this growth is close to stagnation, even a 2.5% growth. However, I believe this is an overly optimistic forecast.

As for how realistic these numbers are, this scenario might happen this year. But the main question is, where do they come from?

State support of the economy is currently the biggest factor that has supported economic growth since the end of 2022. Let me remind you that last year also saw a very favorable economic environment as regards fuel and energy; we received extremely large profits from oil and energy exports. State support and large-scale fiscal stimulus measures resulted in the economy receiving a lot of money, which automatically contributes to an increase in GDP, at least as relates public administration, the defense sector, and social welfare.

So it appears that this growth is to some extent factitious?

– No, not quite. Here we have a different quality of growth; it involves government finances rather than private funds. And, most importantly, the prospects are different as well. Will we have enough money further on? We can see the deficit indicators as well as preliminary monthly estimates reported by the Central Bank, and become aware that we will hardly meet the budget.

It follows that this growth is short-lived and unstable. So I rather agree with the 1.5%–2.5% scenario for 2023. But similar indicators forecast for the future, given the exhaustibility of the state support factor, seem questionable – and all the more so as oil price is unlikely to rise above $150 per barrel. We will spend vast amounts of budget money, with an immense deficit. As we know, this is evidenced by a decision that has already been adopted on prioritizing expenditures.

What does that mean?

– This is not about sequestration or cutting costs, but about prioritization. The effect of this factor is obviously very time-restricted. Next year we will essentially see vast expenditures, but this factor will no longer have such a strong effect, meaning that even the 1.5%–2.5% balanced growth will be very hard to maintain.

The second scenario, named Increased Fragmentation, assumes that next year the GDP growth is expected at near zero, while in 2025 we could expect an increase of up to 1%. What would that mean for the national economy and citizens?

– Ultimately, it concerns citizens as well because it would mean there will no more revenues – and this applies not only to the budget but also to gross value added, which is decomposed into wages and salaries.

It appears that we will no longer have opportunities for the growth in real disposable personal income; this process that can be actually observed now, resulting from vast amounts of money having been injected into the economy, or at most these real disposable incomes are unlikely to increase.

What is zero? It means stagnation and faltering; not quite a fall but not growth either, sort of hibernation.

The Risk scenario would mean a potential global financial crisis. How likely is it?

– A global financial crisis is obviously possible, since the economy is cyclical and crises occur – structural, cyclical crises, caused by external shocks, which are now well underway.

Obviously, we will see another global financial crisis someday as imbalances will accumulate. But it seems unlikely in the near term, within the next few years.

Why is everything not so bad?

– Actually, following the 2008 financial downturn, world economic authorities made certain right conclusions. They took efforts to monitor the situation more closely to prevent accumulation of economic imbalances. Central banks started pursuing more responsible policies, and they generally take proper efforts to handle this quantitative monetary easing that has its negative consequences (such as the risk of eventual severe inflation), since it still supports the economy.

So, given the experience gained as well as better work with new tools, the next global financial crisis could still be avoided to a greater or lesser extent. And while such a scenario does exist, it will hardly occur.

But traditionally, there should be three scenarios; we also have a worst-case scenario, which assumes the most severe possible outcome. So we should be glad of the fact that the current state of affairs is different.

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