Investment and spending drive Russia's growth

2011-11-15 17:25:56

Russia’s economic growth accelerated in the third quarter at its fastest pace in a year, led by investment and consumer spending.

Gross domestic product rose 4.8 per cent in the three months to September compared to the previous year, giving a dose of optimism to Russian economy watchers, who have seen the stock market slide 13 per cent since the start of the year amid predictions of a new global recession and financial turmoil in Europe.

However, the third-quarter rate of growth was less than consensus analyst forecasts, which were for expansion of 5 per cent.

“Economic activity has picked up strength from earlier in the year,” said Ivan Tchakarov, chief economist for Renaissance Capital in Moscow.

“Overall, this is broadly positive, but not very surprising given the low base from last year when the economy felt the full brunt of the summer drought.”

Economists have grown more pessimistic on Russian growth prospects, given the likelihood of a Europe-wide recession and slow pace of domestic reforms. Earlier this year the World Bank revised its growth forecast for Russia down to 4 per cent, from 4.4 per cent. The consensus forecasts of economists for 2012 has fallen by 100 basis points over the past few months to 3.6 per cent.

Vladimir Putin, the prime minister, who has announced he will seek the presidency again next year, has said Russia must resume the robust growth rates of 6 to 7 per cent seen earlier in the decade, which could turn its economy into one of the five largest in the world by 2020.

The likelihood Russia will join the World Trade Organisation in 2012 added to optimism. Russia this month completed entry negotiations and membership will likely be finalised in December.

However, policymakers are pessimistic that Russia can match the growth rates of the last decade without substantial reforms such as privatisation. Economists say these high growth rates were the result of rapidly growing oil prices as well as spare capacity after the post-communist economic collapse of the 1990s.

Current growth levels are driven primarily by stimulus spending and higher than expected import demand from China, according to the Kremlin.

The third-quarter spurt was driven mainly by a rise in investment and consumption. Fixed-capital investment grew 8.5 per cent from a year earlier in September, while unemployment fell to a more than three-year low. Retail sales jumped 9.2 per cent in the biggest increase since October 2008 after a 7.8 per cent gain in August.

Russia’s economy is heavily focused on consumption at the expense of investment, something policy makers are eager to change.

Experts hope plans announced by President Dmitry Medvedev to privatize majority stakes in some large state companies by 2015 will remain in place under Mr Putin, who has shown less enthusiasm for liberal economic reforms.



The Financial Times