Maxim Oreshkin: In the Next Three Years We Expect Sustainable Growth of the National Economy of at Least Two Per Cent
The Russian Economic Development Minister Maxim Oreshkin attended the meeting of the Russian President Vladimir Putin with Government members. They discussed current economic situation in the country, prospects for banking sector and lending market development, ways to increase the minimum wage, and other pressing issues. Particular attention was paid to improving the quality and transparency of housing and utility services rendered to citizens.
The Minister spoke about current economic dynamics, and its forecasts to 2020.
Maxim Oreshkin’s Report:
Mr. President, colleagues,
Actually, we had several not very good years economically, which explains a somewhat pessimistic view of our economy. At the beginning of the year, experts did not expect GDP to grow by more than 1 percent. We can say with confidence now that these pessimistic forecasts have not materialised.
We [at the Ministry] believed early this year that the economy would grow by over 2 percent and that inflation would fall below the 4 percent target. The current dynamics show that our assessments were a bit pessimistic as well. Economic growth accelerated in the second quarter to 2.5 percent, while inflation was 3.2 percent at the beginning of last week.
Investment activity was even higher than we expected: according to available data, it reached 6.3 percent at the end of the second quarter. It is very positive news, because investment projects that are implemented today will boost economic growth tomorrow. Following a minor technical slowdown in July, we expect a new wave of positive news and accelerated economic growth in the next few months. What is the reason for this?
First and foremost, we are entering a long cycle of lending activity in the banking sector. Inflation has stabilised at a low level, and the debt burden on people and companies has decreased over the past few years. Taken together, this created the grounds for a lending cycle that will last many years. When the inflation rate went down to 3.2 percent, it was a signal for the Bank of Russia to reduce interest rates. The goal is, as you know, to maintain inflation at around 4 percent. The Bank of Russia has announced its plans to reduce the interest rate.
If we look at what happened within the banking system over a period of the past month, we will see that our largest banks dramatically reduced mortgage rates. They have cut the basic rate to less than 10 percent, which has increased housing affordability in Russian cities to the highest level so far. In this situation, we expect a record high volume of mortgage contracts this autumn and winter. This will bolster the construction industry and the production of construction materials in the sectors that have idling capacities.
Retail lending is gathering momentum. The important feature that distinguishes the current cycle from the previous one is that our banks are focusing on low-risk lending products, for example, those that are connected to payroll programmes. Therefore, we can expect sustainable dynamics here.
And lastly, corporate lending. Dynamics in this sector have reached positive figures as well, which is propping up the investment activity.
Secondly, we expect the consumer demand to resurge. In addition to the reviving lending activity, which I have mentioned, salaries have started growing as well. This year alone, real wages can grow by over 3 percent, and next year we expect them to grow by some 4 percent, including due to rising wages in the public sector.
Of course, we will need several years to make up for people’s losses in 2014 and 2015, but the crucial thing is that this nascent income growth is not based on oil prices but on the active growth of labour efficiency. We expect it to grow 2 percent; last year we only reported a symbolic growth of 0.1 percent.
Considering the record low unemployment level, which we expect to drop to 4.7 percent in three years, as well as the unfavourable demography, the growth of labour efficiency will be our key to maintaining economic growth and individual incomes.
The third target is the further growth of investment activity. In this context, we must continue working to make conditions for Russian business more predictable. We are moving towards this goal thanks to changes in the macroeconomic policy, which we introduced in the past few years. These include inflation targeting by the Bank of Russia, which has helped us reduce inflation to a record low, a responsible budget policy and the introduction of a new mechanism for moderating the influence of oil prices on the national economy.
It is important that predictability is also growing at the micro level. We have launched a reform of the regulatory system, which is becoming more predictable and, most importantly, is focused on prevention rather than penalty.
Mr President, the decisions you made public at a recent meeting at the Nizhne-Bureiskaya HPP are a major element for reducing administrative pressure.
Another major component of predictability is tariff regulation. This year we continued our indexation policy that includes adjusting prices to inflation targeting. We will soon prepare proposals for transitioning to long-term price formation, so that infrastructure companies and business in general will know that prices will not change for a maximally long period of time. This issue was also discussed at a meeting in Vladivostok.
An important task in the context of the economic policy is active support of tools for investment financing. We have support programmes that are actively developing, primarily investment lending programmes. The programme Six and a Half is in effect for small and medium-sized businesses. Work is underway to launch the “factory of project financing,” which will support projects worth three billion rubbles and up.
I would like to particularly thank the Bank of Russia, which has actively supported this programme’s development. Lower reserve and capital requirements will be applied to banks for the loans issued under this programme. The first loans are expected to be granted in the first quarter of 2018.
It is very important that we have organised the work under both programmes in such a way that allows for adopting a decision on granting a loan without any officials involved.
Of course, an important element for the growth of investment activity is a programme for infrastructure mortgages. I will brief you on its preparation soon. As a result of these programmes and their outcome, we expect active investment growth at 5–6 percent per year during the forecasted period.
It is clear that economic growth largely depends on the Government’s priority projects. As regards the maximum effect on GDP growth, I would like to note a project for creating conditions for active growth of non-resource exports, as well as a recently approved project for increasing labour efficiency. Under the latter, we aim for active cooperation with our Japanese partners, with a corresponding agreement signed at the Eastern Economic Forum.
Due to the 2.1 percent GDP increase this year, in the next three years we expect sustainable growth of the national economy of at least two percent, a stable inflation rate at four percent, and household income recovery. During this three-year period, real wages should increase by about 10 percent.
An increase in wages is extremely important because it allows us to attract and retain the best talent in the country. In today’s global economy, victory in competition goes to those who can, on the one hand, help their people fulfil their potential, and on the other hand, be the most attractive place to live and work to attract the best talent.
There is still a difference between the basic and the desired scenario. The basic forecast gives us 2.3-percent economic growth while the desired growth is 3.1 percent. Therefore, the Government continues to develop and gradually implement more changes to promote economic growth at a rate higher than the global average.
First, in addition to the programmes mentioned here today, I am talking about the digital economy programme, increasing the competitiveness of Russian cities and a number of other projects. I also want to note that the basic scenario so far includes the conservative effect of the measures that were implemented only recently.
During the meeting, the President noted that Russian economy has overcome the crisis and is gathering momentum, and both participants in economic activity and the public will gradually feel the positive effects of the changes in the economy. He mentioned that some experts claim that in general, the actual earnings of the public are still being restored rather slowly, that lately, retail trade has experienced growth of only 0.7 percent, and that, considering the exchange rate difference, imports are growing as well, and Russian producers are already feeling the effect of this: you can see this from what is on the shelves and how retailers are behaving.
“You are correct that income growth has barely resumed and is so far limited in scale, including this year, when we reported an increase in labour efficiency, which provides the basis for the accelerated growth of real wages. Therefore, the measures the Government is taking, the effect of which we will only see in a year or two, are designed to support investment activity for reviving production. The project aimed at promoting the growth of labour efficiency includes the use of modern management technologies at companies, which will help them increase output and revenue per employee.
Taken together, this will create a situation in which we will be able to increase wages and other individual incomes. Importantly, the growth of labour efficiency must go together with an increase in salaries, and this growth must be balanced and sustainable so that we do not roll back after a while.
As for the exchange rate, the situation is indeed ambiguous. The rubble has strengthened compared to the dollar but the rubble/euro rate has weakened compared to last year. The reason for this is that the dollar has weakened greatly relative to all global currencies this year. The euro/dollar rate has grown from EUR 1.05 early this year to over EUR 1.20.
But it is true that the volume of imports has grown. This is evidence of resurging consumer demand. We see that car sales have increased 16 percent compared to last year. A large share of car parts is imported, which is increasing imports.
Our task is to maintain the competitiveness of Russian companies. However, I believe that we should do this not by reducing individual’s real incomes, but primarily by investing in new equipment, by introducing new technologies, including management technologies, and by digitalising production. The measures I have mentioned are aimed at this, including such vital elements as reduced administrative pressure and enhanced tariff predictability,” Maxim Oreshkin commented on.