Between January 1 and 20, 2025, the Central Bank conducted a survey among 14,800 non-financial enterprises and recorded a gradual slowdown (as of the end of 2024) in the growth of business activity. Invest Foresight interviewed Nikita Maslennikov, Head of Economics and Finance at the Institute of Contemporary Development, about the potential risks of this trend for the Russian economy.
– Mr Maslennikov, the business climate indicator calculated by the Central Bank based on seasonality, has decreased for the third month in a row. What does this mean?
– This is indeed a trend, showing that there is an economic slowdown after the overheating. Yes, the numerical value of the business climate indicator is currently at the level of approximately 2023, which suggests that the economy is still more overheated than slowing down. However, it has not yet reached the trajectory of stable, balanced growth. But it is moving in this direction.
– The survey of non-financial enterprises seems to mention a number of other factors that are worth paying attention to. Is that correct?
– Yes, for example, current assessments have improved slightly, but expectations for the next three months, naturally, have become more moderate. At the same time, when it comes to assessing the availability of labor and the need for it, for example, the labor shortage figures are at their highest. And plans for additional employment have also become more moderate.
– Planned investment activity has also declined.
– Yes, a very important point is also that investment plans have become more moderate. They were lower in Q3 2024 than in Q4. For the first quarter of 2025, the figures are still below the average for 2024. At the same time, costs have decreased slightly, and several other factors have also shifted in that direction.
It’s also telling that businesses are expecting inflation to exceed the forecast, and significantly so, compared to the percentages included in the budget. The Central Bank has estimated the expected average annual inflation for 2025 to be between 6.1% and 6.8%.
Another crucial indicator is that business plans are factoring in an annual inflation rate of 10.7%.
– What does this mean?
– From a business perspective, it suggests that the economic situation is highly unstable. The perceived rigidity of monetary policy is expected to be roughly the same as in November-December, but with the added impression that it may be even more rigid.
– What’s needed to reverse the trend?
– There is a slowdown trend, but there are also factors that could, at least for now, help adjust the pace of that slowdown. All of our indicators are cost-related. It’s possible that inflation will rise in the coming months (with the Central Bank predicting it will peak around April or early May), and then start to decrease.
The business climate index is significantly influenced by this, so some upward movement is possible.
Interestingly, this outlook is supported by the forecast from the Institute of National Economic Forecasting, which predicts that GDP growth in the first half of the year could be around 3%. However, a clear and noticeable decline is expected to follow.
– The index appears to be a warning from the Central Bank for us, or rather, for businesses.
– Basically, the Bank of Russia’s survey results can be seen as the first rumblings of thunder. Although the storm hasn’t yet started and there is no heavy rain, the situation needs to be properly assessed.
So far, we are expecting a pause, some sort of uncertainty, particularly in the first quarter of the year and to some extent in the second one, when both GDP and production output cost indicators will be fairly adequate due to inflation still being high. For business, however, the situation still looks challenging.
– In this regard, the year’s beginning is not totally indicative.
– Indeed. On the one hand, the start of the year always differs from the year in general – for instance, with no one working for half a month in January, average estimates look more pessimistic than the year’s overall indicators.
Yet, these indicators are rather interesting. January surveys conducted by the Institute of Economic Forecasting have indicated a drop in the industrial optimism index, with the negative trend observed for the first time since 2022. The surveys also revealed a declining sales index. At the same time, the finished goods inventory index has risen to its highest over the past 55 months.
– Overstocking is clearly present.
– It really is. Obviously, January still falls within the indicators typical of the slowdown’s seasonal character. This time, though, the assessments look a bit harsher than the ones in the previous three years (we are not taking the pandemic into account).
However, the early warning signs indicate that the economic cooling spring is nearly compressed to the full and will expand in the second half of the year. Therefore, 2025 will be the year of two macroeconomic halves: in the first one, we will generally see things go normal and the banking regulator perhaps even cool down a bit. However, some external factors possibly interfering, such as postponed negotiations, may result in a new round of sanctions and another, rather unfavorable inflation outlook.
– And this is impossible to forecast.
– True. It is really impossible to predict whether this scenario is realistic. But even if things unfold more or less smoothly, this year’s second half will still see a decline in indicators. Our growth rates will probably be lower than the 2.02-2.5% predicted by the Ministry of Economic Development. In April, however, Maxim Reshetnikov announced a revision of the baseline forecast – which obviously also needs to be done as we now have a somewhat skewed view of the budgetary incentive the economy can get. Just to remind, the budget was approved and adopted with the key rate for 2025 set at 15.1% and inflation at 4.5%. In any case, many adjustments will need to be made.