MOSCOW - The World Bank has lowered its forecast for Russian GDP growth this year to 3.5% from the 3.8% it was predicting last September, and expects the country's GDP to grow 3.9% in 2013.
Despite production growth in Russia slowing somewhat this year behind weakening economic growth in Europe and other parts of the world, the Russian economy has of late been showing steady growth supported by high oil prices, the World Bank says in its latest Russian Economic Report, published March 27.
But the bank believes the closing of the gap between actual and potential output, tougher conditions in the labor market and slight drop in oil prices will restrict economic growth in Russia.
Russian economy
The World Bank presented two growth scenarios for the Russian economy. The baseline one assumes oil will average at $98.2 a barrel in 2012 and $97.1 in 2013; and the second scenario assumes it will trade at $125 a barrel.
In the baseline scenario, GDP will grow 3.5% in 2012 and 3.9% in 2013.
If oil prices are higher, GDP could grow 4% in 2012 and 4.2% in 2013.
"With the slowdown of growth in Europe and elsewhere, growth in Russia is likely to moderate somewhat in 2012, before picking up again in 2013. Downside risks to growth include a drop in oil prices either due to weak global demand or a correction of oil supply disturbances. In addition, growth could disappoint in case consumption and investment weaken in view of tight liquidity and sluggish external demand. Upside risks include that oil prices remain high as supply disturbances continue or global demand rebounces faster-than-expected from the current slowdown," the report says.
"Half a year ago, Russia’s economic prospects looked uncertain. The global economy was losing momentum, the expansion in the euro area was grinding to a halt and commodity prices were beginning to fall. Yet, while output growth is slowing this year in line with weaker growth in Europe and elsewhere, Russia’s latest economy performance has been solid, though aided by favorable oil prices.
The economy returned to the pre-crisis peak towards the end of last year, supported by strong consumption, as growth held steady at the same rate as in 2010. In 2011, measured in current dollars, Russia’s economy was the ninth biggest in the world, compared to the eleventh biggest in 2007.
This year, Russia’s output might exceed $2 trillion. Equalizing for prices difference with purchasing power parity, Russia’s economy is already the sixth biggest today.
The current account looks strong thanks to a large surplus in the trade balance, and the Central Bank of Russia added again in 2011 to its stock of foreign reserves.
Employment returned to pre-crisis levels even earlier than output, and wages grew at a solid pace. Inflation reached its lowest level in two decades. Inequality declined and consumption levels of low-income households improved. The fiscal balance returned to a surplus.
And while average public debt levels in advanced economies exceeded 100 percent of GDP in 2011, Russia’s public debt was no more than 10 percent of GDP.
However, a fair share of the recent accomplishments is tied to high oil prices. Boosted by supply constraints rather than strong global demand, the price of Urals crossed US$125/barrel in early March 2012, the first time since July 2008.
High oil prices have translated into strong export receipts, buoyant fiscal revenues, and a bullish stock market. Nevertheless, in spite of high oil prices, Russia’s economic expansion remains subdued.
Indeed, Russia’s recovery from the 2008 crisis was slow compared to its recovery from the 1998 crisis, as well as compared to the recovery of many other economies in the last few years."
The Russian Economic Development Ministry forecasts GDP will grow 3.7% in 2012, 4% in 2013 and 4.6% in 2014. Urals crude could trade at $100 a barrel in 2012, $97 in 2013 and $101 in 2014. GDP grew 4.3% in 2011, as in 2010.
Fragile global recovery
Economic news during the first two months of 2012 has been positive, but the global recovery remains fragile, the World Bank said.
"After several months of heightened uncertainty, conditions in financial markets have improved significantly during the first three months of 2012, with spreads paid on sovereign debt of both high-spread European and developing economies coming off their late 2011 highs in response to ECB policy steps, the successful restructuring of Greek debt and progress toward fiscal consolidation.
In spite of these positive developments, the uncertainty of the second half of 2011 has taken its toll, with Europe having re-entered recession toward the end of 2011 and falling European imports cutting into global trade.
In 2012, growth in the euro area is expected to drop more than 1.5 percentage points, leading to a mild recession in the euro area and stagnation in the EU.
Despite these headwinds, economic activity and business expectations outside of Europe are improving.
The recovery in the US is strengthening and other emerging economies such as Brazil, China, India, South Africa and Turkey, where industrial production had been previously decelerating, are now all seeing an up-tick in activity.
Reflecting these improving prospects, metal and oil prices have firmed in recent months.
Nevertheless, continued fiscal contraction in Europe, ongoing banking-sector de-leveraging, and still elevated risk aversion are all expected to weigh on activity in 2012.
After expanding 4.2 percent in 2010, global GDP slowed to 2.7 percent in 2011, and is expected to come in at a relatively weak 2.5 percent in 2012 before firming to 3.1 percent in 2013.
Developing country growth is projected to come in at 5.4 percent, the second worst result in 10 years-only the crisis year of 2009 was worse. GDP among high-income countries is expected to expand only 1.4 percent.
Outturns remain vulnerable to a deterioration of conditions in Europe. While the likelihood of such a significant deterioration has eased, the risk remains real and could have large implications for the global economy including developing countries."
Strong balance of payments
"In our baseline scenario, the current account surplus and capital account deficit are set to decline and the fiscal balance is set to turn into a deficit," the World Bank said.
"The balance of payments position is expected to remain strong, even though capital flows are likely to remain volatile. Under our conservative oil price forecast, we expect the surplus of the external current account to reach 2.9 percent of GDP in 2012 and 1.4 percent of GDP in 2013. This reflects a combination of stagnant oil production volumes, somewhat moderating oil prices, and increasing import demand."
The current account deficit could, under the baseline scenario, be $53.8 billion or 2.7% of GDP in 2012, and $25 billion or 1.1% in 2013. The consolidated budget deficit would be an estimated 1.3% and 0.9% in current prices, respectively.
If oil trades at $125 a barrel, the current account surplus will an estimated $89.4 billion or 4.1% of GDP in 2011, and $47.5 or 1.8% in 2013. There would be a consolidated budget surplus if 1.4% and 2% of GDP in the respective years.
In September, the World Bank said it expected Russia would have a current account surplus of $21 billion in 2012.
The World Bank expects the capital account deficit to widen to $48 billion or 2.4% of GDP in 2012, under the baseline scenario, from the $6 billion it forecast in September. A deficit of $21.6 billion or 1% of GDP is forecast for 2013.
If oil prices are high, the capital account deficit might be $39.5 billion or 1.8% of GDP in 2012 and $2.6 billion or 0.1% in 2013.
"If the oil price were to remain high, this would boost growth, improve current and capital account balances and help to maintain the surplus of the fiscal accounts. At the same time, it would lead to price pressures and increase the risk of overheating in the economy," the World Bank said.
Inflation
The World Bank lowered its inflationary expectations somewhat for 2012, from 6%-7% to the upper limit of the 5%-6% band that the Central Bank is predicting.
"Inflation is expected to stay low in the coming months in view of tight monetary policy and recent exchange rate appreciation. However, it is set to increase later in the year as the delayed increases in utility prices take effect in July. In addition, demand pressures are likely to strengthen as the output gap closes and labor shortages emerge. By year-end, inflation could be close to the upper limit of the CBR’s target band of 5.0 to 6.0 percent," the World Bank said.
