Economists do not expect a crisis this year, but it is possible that we will have to pay for overheating next year.
Economic overheating is a state where the economy is growing very rapidly. Much faster than its structure allows.
“At the end of last year, the growth of Russia’s gross domestic product (GDP) was 3.6 percent, and in the first quarter of this year – 5.4 percent. This means that our indicators exceed the world average,” Vladimir Putin said about these achievements of the Russian economy at the St. Petersburg International Economic Forum.
In the same speech, he cited record low unemployment and a “new quality of the labor market.” “Even 15-20 years ago, the main question was how to find a job, and now – where to find workers,” said the Russian president.
Both low unemployment and high GDP growth rates are signs of an overheated economy. It is driven by huge budget expenditures related to war, including payments to mobilized and contracted soldiers, compensation to the wounded and families of the dead, as well as government orders for defense and various subsidies to the military industrial complex. This money spreads throughout the economy and causes it to overheat.
“The economy is working at the limit of its capacity. This cannot last long,” Ruben Jenikolopov, professor at the Pompeu Fabra University in Barcelona (Spain), thought in an interview with the BBC.
He draws a parallel between an overheated economy and a tired person: “Each of us can feel it – we can work very hard, but there comes a period when we need to rest, otherwise we can burn out.”
Elvira Nabiulina, head of the Russian Central Bank, speaks publicly: “GDP growth rates remained high in the first and second quarters. At the same time, inflation accelerated. This means that the economy remains significantly overheated. Reserves of manpower and production capacity are practically exhausted.”
E. Nabiulina even mentions a crisis scenario, writes “bbc.com”.
“Basically, this is a stagflation scenario. It will be possible to stop it only at the price of a deep recession”, said E. Nabiulina. Stagflation is a state where the economy is not growing or even falling, but inflation is very high. Companies suffer losses, people’s incomes are eaten away by inflation.
Signs of overheating in the Russian economy began to appear after the country attacked Ukraine. This state of affairs has been going on for about a year now – at least Central Bank economists started talking about it in 2023. in the summer
Signs of fever
“Unemployment has reached a level that is definitely not normal,” said R. Jenikolopov. According to him, the situation in the labor market is becoming an obstacle to the economy.
In May of this year, the unemployment rate in the country reached 2.6 percent. This is a historically very low rate. At that time, almost 450 thousand people were registered with the employment service. people. And Russia’s state statistics agency Rosstat estimated that the need for workers exceeded 2 million. working people. This means that employers needed far more workers than were available on the labor market.
A combination of several reasons is to blame for this: the demographic gap and the entry of the scarce 1990s generation into the labor market, the mobilization and departure of part of the population abroad, and a decrease in the flow of migrants. The latter were caused by the war and the policies of the authorities.
Labor shortages are fueling rapid wage growth. In April of this year, the average salary compared to 2023 in April, increased by 16.5 percent. In some regions, for example, the Krasnodar Territory or the Kurgan Region, wages increased by more than 20 percent during the same period.
R. Jenikolopov notes that the rapid growth of wages is also a sign of overheating of the country’s economy. Director of the Economic Policy Research Center of the Faculty of Economics of Moscow State University, Oleg Buklemishev, agrees with this. “It’s obvious: in the current economic situation, the most lacking resource is the labor force,” he explains.
Rising wages may seem like a good indicator of the economy. But there is a risk: Central bank analysts say wages are growing faster than labor productivity. Demand in the economy exceeds supply, leading to high inflation.
O. Buklemishev indicates another sign of overheating – “price growth in the rest of the economy, which clearly exceeds the previous forecast of the Central Bank”.
Compared to 2023 June 2024 in June, prices increased by 8.6 percent. The increase in the prices of food products was almost 10% per year, specifically fruits and vegetables increased in price by almost 20% per year.
High inflation actually eats up some of the wage growth: people seem to be getting more money, but for that amount they can afford much less.
According to the updated forecast, the Central Bank believes that inflation will reach 6.5-7 percent.
But on the surface, the economy looks good despite these obstacles. In the first quarter of this year, GDP grew by 5.4 percent. This is a very high result. The Russian economy has not shown such growth rates for a long time.
The central bank reported a slight slowdown in April, but economic activity picked up again in May and June.
“The overheating observed in the second quarter is more like a textbook one – a clear overheating,” explains Sofja Donets, Chief Economist of T-Investiciji. Previously, episodes of such clear overheating were quite rare in Russia.
“Classic overheating does not last forever,” emphasizes S. Donets. However, according to her, it can be affected by anything, not only some economic factors, but also, for example, the mood or expectations of companies or residents. “We really shouldn’t remove geopolitics from this equation,” adds the interviewer.
What can cause overheating?
Central banks usually respond to an overheating economy by raising the key interest rate. As a result, loans become more expensive. They are taken and issued less. It also makes it more profitable for people to keep their money in banks. Thus, an increase in the interest rate leads to a slowdown in loan demand and investment, sometimes leading to economic recession.
This is exactly what is happening now: after the Central Bank of Russia increased interest rates to 18 percent, E. Nabiulina said that the Central Bank does not intend to reduce interest rates for the time being. She did not rule out the possibility that they will have to be increased. According to the head of the Central Bank, this is the only way to avoid a stagflation scenario.
There is a difference from the classical overheating: after all, this situation has arisen in the Russian economy due to the large budget expenditures for the war, which are not reduced. This year’s budget expenditures will amount to almost 38 trillion. rubles. Of them, more than 20 trillion. already released. in 2023 budget expenses were lower – 32 trillion. rubles.
“The central bank is trying to compensate for the government’s policy, because the causes of economic overheating and growth are high state budget expenditures,” explains R. Jenikolopov. According to him, the government is trying to increase economic growth. It could solve the problem of overheating, but it does not want to, my interlocutor.
“Talks about cooling the economy are from the Central Bank’s lexicon, because there is no such thing in the government’s dictionary. The government is sitting quietly and is quietly happy that the economy is growing much faster than was predicted earlier”, comments O. Buklemišev.
V. Putin and various officials mention relatively good economic numbers when talking about the government’s achievements. They gloss over the long-term negative consequences.
R. Jenikolopov warns what the growth of inflation could end up being: “You can try to continue pumping money into the economy, but if cooling is already underway, there is probably a very high risk that inflation will become uncontrollable.”
A vicious circle
Although not very noticeable, the first crisis scenarios also appear. For example, the Center for Macroeconomic Analysis and Short-Term Forecasts predicts that rising interest rates will lead to an increase in delinquent debt. As a result, some large banks will have problems and the state will have to help them.
However, economists interviewed by the BBC do not expect such a scenario. R. Jenikolopov only talks about business risks: although companies are making profits due to an overheated economy, costs, at least for the workforce, are also increasing. If the economy slows, many companies, he said, could face cost overruns, which could lead to bankruptcy.
“If the government starts cutting costs, the most overheated sectors will suffer the most. And this can reduce GDP growth, which will lead to cuts in government spending. This is a vicious circle that we risk getting into, because the current situation is unstable,” says the economist.
Summing up the consequences of overheating, we can say: the economy will slow down, businesses will earn less, as a result there will be problems for companies and part of the population will lose their income. Authorities will collect less taxes, and some expenses will have to be cut. This will affect those sectors that will receive less money from the state. In turn, this will mean that wages are unlikely to increase rapidly. Most likely, the problems of some banks will also contribute.
The worst case scenario is if inflation gets out of control. In this case, the rapid growth of prices will affect people’s income even more strongly – residents will spend more and more on food and other goods.
What else to expect this year?
The central bank expects the economy to gradually cool down. Economist Natalija Zubarevič also claimed to notice signs of cooling in an interview for the Redakcija project.
Economists polled by the BBC do not expect any crisis in the near future either. S. Donec is convinced that by the end of the year GDP growth will exceed 3 percent, and inflation will be higher than 6 percent. Both one and the other indicator are quite high.
O. Buklemishev believes that inflation can reach 5-6 percent, while he predicts a much more modest GDP growth – only 2 percent.
“As for GDP, I suspect that in 2024 we won’t see anything bad, but if any problems start, it will be at the end of the year. The problems I mentioned are accumulating, and for now the economy is living with painkillers, relieving the symptoms”, explains R. Jenikolopov. This year, he expects 2.5-3 percent. GDP growth.
The economist believes that serious signs of economic slowdown will be observed next year. This, he says, is a “manifestation of the effects of overheating.” “The disease will appear sooner or later,” the interlocutor is convinced, “but when exactly – it’s hard to say.”
2024-08-21 08:26:24