Alexey Ulyukaev: The economy growth in 2016 will be mainly driven by a gradually recovering consumer demand


On October 8, 2015, Alexey Ulyukaev, Minister of Economic Development of the Russian Federation, presented to the Government a forecast of Russia's social and economic development for 2016 and the target period of 2017 and 2018.

"The Government has based the budget on the national social and economic development forecast for 2016–2018 but we are fully aware of all forecasting challenges today. Everyone finds forecasts unreliable but how could you make a good forecast in such volatile conditions," commented Dmitry Medvedev, Russian Prime Minister at the opening of a government session. "Still, we will reply on a base case scenario of the forecast with an underlying fairly conservative oil price estimate, with the word "conservative" being of importance here. This scenario involves a moderate growth of social commitments. There are certainly other more optimistic estimates and time will tell us what really happens. However, with increased uncertainty in the market I've been speaking about, it is reasonable to be guided by the conservative scenario and a cautious forecast."

According to the Minister of Economic Development of the Russian Federation, "since mid-year, the Russian economy has demonstrated flexibility and adapted to cardinally new conditions, including closure of global capital markets and worsened conditions for almost all commodities." A production decline is not progressing any more. Russia's GDP has demonstrated almost zero monthly trends given a seasonal boost over the last three months. Still, he insists that a lending growth has recovered and retail turnover decline has ceased since mid-year along with growing financial performance of businesses.

August witnessed some positive trends in farming (1.0% MOM, 2.3% YOY). Retail has stabilised (0.0% MOM, -9.1% YOY). A negative trend is still observed though in investment (-0.2% MOM, -6.8% YOY) and construction sector (-0.6% MOM, -10.7% YOY) with industrial production experiencing a new decline in July after stabilisation (-0.3% MOM, -4.3% YOY). The mining industry demonstrates a positive trend. The companies' balanced financial result remains positive with a 37.5% growth over the seven months of the year.

"Risks through remain high and we have based our forecast on very conservative assumptions," Alexey Ulyukaev said. The forecast base case scenario for 2016–2018 stipulates an average Urals oil price of USD 50, USD 52, or USD 55 respectively. "However, a consensus forecast of bank analysts indicates higher prices of USD 57 per barrel in 2016, USD 64 in 2017, and USD 69 in 2018," he said.

The estimates of the Ministry of Economic Development show that while the economy is adapting to the current environment, it might start to recover as early as in Q4 2015. "We are based on the assumption that the performance in Q4 will be slightly better than in Q3. A decline in Q2 and Q3 was 4.5% improving to 3.9% in Q4. The final GDP result will be -3.9%," Alexey Ulyukaev said.

"We see solid grounds to expect a recovery growth in 2016. And while Q4 demonstrates a gradually reducing decline quarter over quarter and a burgeoning growth and promises to be slightly better than Q3, we expect to achieve positive year over year performance starting form Q2 2016 and a 0.7% GDP growth in 2016," the Minister added.

According to Alexey Ulyukaev, the economy growth in 2016 will be mainly driven by a gradually recovering consumer demand. The retail turnover is expected to reach 0.4% next year and production inventory will restore at the previous level.

"Unfortunately, this emerging growth cannot be supported by investment yet. We expect corporate investment plans to be a remote prospect. So, a decline in investment will be certainly less than forecasted this year at 9.9% but a 1.6% decline cannot be ignored. We expect to recover our gross savings from 2017 to fuel economy growth," the Minister added.

Alexey Ulyukaev believes that an investment growth to start in 2017 will trigger an economy growth to 1.9% in 2017 and to 2.4% in 2018. He expects an investment growth rate in 2017 to be 4.8% reaching 5.4% in 2018 (according to the targeted forecast with 2.1 and 2.6 according to the base case, respectively).

"We expect inflation to slow down as a current high inflation wave is estimated to be short-term and mainly related to FX changes. Therefore, we expect a consumer price growth to slow down in 2016 almost twice from 12.2% in 2015 to 6.4% next year. Future moderate monetary policy and natural monopoly tariffs policy support this trend and will drive the inflation down in 2017 and 2018 to 6% and 5%, respectively," the Minister said.

"As regards industrial production, a moderate growth of 0.6% is forecasted for 2016 with an overall growth of 4.1% from 2016 to 2018. Faster rates of about 5.5% over three years are expected in the processing industry. The locomotive industries are transport engineering (over 7% over three years) and electrical equipment engineering (6.4%)," the Minister said.

"Generally, this year will be substantially positive with over USD 70 billion on the current account which will significantly exceed the loss on the capital account caused by capital markets being inaccessible for our borrowers and the need of using internal sources to repay the external debt. Nevertheless, we expect a positive balance in the current account to exceed the negative balance in the capital one by making the entire macroeconomic system more sustainable", he declared.

Alexey Ulyukaev also informed that the forecast implies a reduction of the unemployment rate from 5.8% in 2015 and 2016 to 5.7% in 2017 and 2018.

Furthermore, a conservative economy development scenario was drafted based on the extremely cautions assumptions of the global environment reducing to USD 40 per barrel to become a permanent trend over the period in question. "This is certainly the worst case scenario for economy recovery. It provides for an economy decline of 1% in 2016 with stabilisation expected in 2017 and a growth assumed for 2018," Alexey Ulyukaev stated. But he mentioned that even the base case for the oil price was "fairly conservative" and a consensus forecast of economists was higher than that budgeted by the government as the base case.

The targeted scenario presented by the Minister provides for a gradual stable growth of the Russian economy at a pace similar to the average global one, reduction of inflation to 4% and productivity increase by at least 5% subject to concurrent macroeconomic balance. "In order to achieve the target GDP, an investment growth of 7% to 9% is required and GDP-related capital gross savings by 2018 are to be increased to 22% which is 3% above the current level," he said. "A 2.3% GDP growth in 2016 is assumed in these conditions followed by acceleration to 3.3% and 4.4% in 2017 and 2018 respectively."