September 2015 | Edition No. 34 Main messages 1 The adjustment to - - PowerPoint PPT Presentation

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September 2015 | Edition No. 34 Main messages 1 The adjustment to - - PowerPoint PPT Presentation

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Balancing Economic Adjustment and Transformation Russia Economic Report September 2015 | Edition No. 34 Main messages 1 The adjustment to the 2014 terms-of-trade shock continued amid a Russias recession tense geopolitical context marked

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SLIDE 1

Russia Economic Report September 2015 | Edition No. 34 Balancing Economic Adjustment and Transformation

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SLIDE 2
  • The adjustment to the 2014 terms-of-trade shock continued amid a

tense geopolitical context marked by international sanctions.

  • Growth dropped in H1 to -3.5 percent as the contraction in domestic

demand, especially consumption, accelerated.

  • Real wage and income erosion increased poverty and HH vulnerability.

Russia’s recession deepened with a severe impact on households The policy response was successful in stabilizing the economy

  • The transition to a free float eased pressure on external balances and

measures to support the financial sector contained systemic risks.

  • The anti-crisis plan cushioned effects of a difficult fiscal consolidation.
  • Key challenges of lowering inflation, completing the fiscal adjustment

and continuing financial market restructuring remain.

Economic policy has to balance the current adjustment and long- term transformation

  • Adverse external conditions and policy uncertainty pose challenges to

growth, projected at -3.8 percent in 2015 and -0.6 in 2016.

  • Two alternative oil price scenarios address high external volatility.
  • Poverty is projected to increase in 2015 to 14.2 percent from 11.2 in

2014 – the first significant increase since the 1998-1999 crisis.

1 2

Growth prospects are negative and shared prosperity achievements reverse

  • The economic adjustment process keeps risks to financial stability and

fiscal sustainability high amid difficult global economic conditions.

  • Russia faces a dual−demographic and economic−transformation.
  • Successful policies will require a combination of fiscal and regulatory

disciple, and institutional capacity building.

4

Main messages

3

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SLIDE 3

Recent Economic Developments: Weathering the Storm

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SLIDE 4
  • The adjustment to the 2014 terms-of-trade shock continued amid a

tense geopolitical context marked by international sanctions.

  • Growth dropped in H1 to -3.5 percent as the contraction in domestic

demand, especially consumption, accelerated.

  • Real wage and income erosion increased poverty and HH vulnerability.

Russia’s recession deepened with a severe impact on households The policy response was successful in stabilizing the economy

  • The transition to a free float eased pressure on external balances and

measures to support the financial sector contained systemic risks.

  • The anti-crisis plan cushioned effects of a difficult fiscal consolidation.
  • Key challenges of lowering inflation, completing the fiscal adjustment

and continuing financial market restructuring remain.

Economic policy has to balance the current adjustment and long- term transformation

  • Adverse external conditions and policy uncertainty pose challenges to

growth, projected at -3.8 percent in 2015 and -0.6 in 2016.

  • Two alternative oil price scenarios address high external volatility.
  • Poverty is projected to increase in 2015 to 14.2 percent from 11.2 in

2014 – the first significant increase since the 1998-1999 crisis.

1 2

Growth prospects are negative and shared prosperity achievements reverse

  • The economic adjustment process keeps risks to financial stability and

fiscal sustainability high amid difficult global economic conditions.

  • Russia faces a dual−demographic and economic−transformation.
  • Successful policies will require a combination of fiscal and regulatory

disciple, and institutional capacity building.

4

Main messages

3

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SLIDE 5

Sounding the Depth of Russia’s Recession

GDP growth, y-o-y and q-o-q sa, Percent

0.8 1.2 1.5 1.2 0.9 0.5 0.3 0.0 0.5 0.3 0.4 0.3 0.1 0.4 (0.3) (0.7) (1.6) (2.0)

  • 5
  • 3
  • 1

1 3 5 GDP growth, y-o-y GDP growth, q-o-q, sa

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SLIDE 6

Russia’s Adjustment to the Terms-of Trade Shock

Gross Domestic Income Growth, y-o-y, Percent

  • 20.0
  • 15.0
  • 10.0
  • 5.0

0.0 5.0 10.0 15.0 20.0 real GDP growth terms-of-trade effect

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SLIDE 7

Real Effective Exchange Rate Adjustment to Oil Prices Led to Lower Domestic Demand

Real Effective Exchange Rate and Oil Price (Brent), Q4=2007 = 100

50 60 70 80 90 100 110 120 130 140 150 80 85 90 95 100 105 110 115 120 Real Effective Exchange Rate (4Q 2007 = 100) Oil price (Brent), (4Q 2007 = 100)

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SLIDE 8

A Substantial Improvement in Net Exports only Partly Offset the Output Contraction

Demand Composition of Growth

  • 25
  • 15
  • 5

5 15 Consumption Gross Fixed Capital Formation Change in inventories Export Import Stat error GDP growth

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SLIDE 9

Consumption Fell Fastest since the 1998 Crisis

Demand Composition of Growth

  • 25
  • 15
  • 5

5 15 Consumption Gross Fixed Capital Formation Change in inventories Export Import Stat error GDP growth

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SLIDE 10

→ Consumer Demand Dropped as Double-digit Inflation Eroded Real Wages

Real wage growth, y-o-y, Percent, Russia’s CPI inflation Components

  • 15
  • 10
  • 5

5 10 15 20 25

2009 2010 2011 2012 2013 2014 2015

Total Tradables non-Tradables Public

5 10 15 20 25 1401 1402 1403 1404 1405 1406 1407 1408 1409 1410 1411 1412 1501 1502 1503 1504 1505 1506 1507 1508 Core inflation CPI inflation Food inflation Non-food inflation Services inflation

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→ Declining Real Incomes Significantly Increased Poverty Rates and Vulnerability of Households

Contribution to Real Incomes Growth, Government Anti-Crisis Plan By y-o-y, Percent Category of Expenditure, Billion rubles

  • 6
  • 4
  • 2

2 4 6 8 10 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 2009 2010 2011 2012 2013 2014 2015

Others Business and property Public wages and transfers Market wages Total

1550 320 296 160

Bank recapitlization Support to the economy Social support Support to the regions

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SLIDE 12

The REER Adjustment Had an Uneven and Limited Impact on the Tradable Sector

Growth in Tradables, y-o-y, Percent Investment Growth by Sector, H1 2015, y-o-y, Percent

  • 27.3
  • 20.6
  • 14.1
  • 10.7
  • 5.9

0.2 9.6 14.9 18 23.1

  • 30
  • 20
  • 10

10 20 30

  • 15
  • 10
  • 5

5 10 15 20 2008 2009 2010 2011 2012 2013 2014 H1 2015 Agriculture Mineral extraction Manufacturing

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SLIDE 13

Investment Fell as Firms Reduced Inventories

Demand Composition of Growth

  • 25
  • 15
  • 5

5 15 Consumption Gross Fixed Capital Formation Change in inventories Export Import Stat error GDP growth

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SLIDE 14

→ Business Confidence Deteriorated due to Weak Domestic Demand and Policy Uncertainty

Business Confidence Surveys in Key Constraints to Manufacturing, Manufacturing Rosstat Business Survey, Percent

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4

  • 9
  • 8
  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 Business Confidence PMI

0.0 10.0 20.0 30.0 40.0 50.0 60.0 Weak domestic demand High tax level High policy Uncertainty High interest rates Lack of financial resources Jan-Jun, 2015 Jan-Jun, 2014

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SLIDE 15

Growth and Poverty Outlook: High Uncertainty Prevails

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SLIDE 16
  • The adjustment to the 2014 terms-of-trade shock continued amid a

tense geopolitical context marked by international sanctions.

  • Growth dropped in H1 to -3.5 percent as the contraction in domestic

demand, especially consumption, accelerated.

  • Real wage and income erosion increased poverty and HH vulnerability.

Russia’s recession deepened with a severe impact on households The policy response was successful in stabilizing the economy

  • The transition to a free float eased pressure on external balances and

measures to support the financial sector contained systemic risks.

  • The anti-crisis plan cushioned effects of a difficult fiscal consolidation.
  • Key challenges of lowering inflation, completing the fiscal adjustment

and continuing financial market restructuring remain.

Economic policy has to balance the current adjustment and long- term transformation

  • Adverse external conditions and policy uncertainty pose challenges to

growth, projected at -3.8 percent in 2015 and -0.6 in 2016.

  • Two alternative oil price scenarios address high external volatility.
  • Poverty is projected to increase in 2015 to 14.2 percent from 11.2 in

2014 – the first significant increase since the 1998-1999 crisis.

1 2

Growth prospects are negative and shared prosperity achievements reverse

  • The economic adjustment process keeps risks to financial stability and

fiscal sustainability high amid difficult global economic conditions.

  • Russia faces a dual−demographic and economic−transformation.
  • Successful policies will require a combination of fiscal and regulatory

disciple, and institutional capacity building.

4

Main messages

3

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SLIDE 17

Russia’s External Conditions Remain Adverse

World Merchandise Trade Volumes Gross Capital Flows, US$ Billion Log Index 1991 = 100

5000 10000 15000 20000 25000 30000 35000 2010 2011 2012 2013 2014 2015 South Caususes Central Asia Central Europe and The Baltics Ukraine Russia Turkey

90 95 100 105 110 115 120 125 130 135 140

1991m01 1992m01 1993m01 1994m01 1995m01 1996m01 1997m01 1998m01 1999m01 2000m01 2001m01 2002m01 2003m01 2004m01 2005m01 2006m01 2007m01 2008m01 2009m01 2010m01 2011m01 2012m01 2013m01 2014m01 2015m01

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SLIDE 18

Russia’s Short-term Outlook is Negative

Real GDP Growth Projection, y-o-y, Percent

  • 4.3
  • 2.8

0.0 3.4 1.3 0.6

  • 3.8
  • 0.6

1.5

  • 3.2

1.3 1.7

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 2012 2013 2014 2015 2016 2017 Lower-bound scenario Baseline scenario Upper-bound scenario

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SLIDE 19

Real GDP Levels Will Fall Below 2012

Real GDP Projection, Percent, 2012=100

97.5 94.8 94.8 100.0 101.3 101.9 98.0 97.4 98.9 98.6 99.9 101.6 93 94 95 96 97 98 99 100 101 102 2012 2013 2014 2015 2016 2017 Lower-bound scenario Baseline scenario Upper-bound scenario

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SLIDE 20

Shared Prosperity Achievements Reverse

Poverty Rate Projections, Percent

15.2 13.3 13.4 13.0 12.5 12.7 10.7 10.8 14.2 14.6 14.0 11.2 14.5 15.8 16.5 14.1 13.0 11.7 0.41 0.412 0.414 0.416 0.418 0.42 0.422 0.424 10 11 12 13 14 15 16 17 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Baseline scenario Lower-bound oil price scenario Upper-bound oil price scenario Gini (rhs)

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SLIDE 21

Russia’s Middle Class Growth Stalled

Share of the Population with Per Capita Income in US$ ppp / day

10 20 30 40 50 60 70 80 90 100 More than 50 USD/day 25-50 USD/day 10-25 USD/day 5-10 USD/day Less than 5 USD/day More than 10 USD/day

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SLIDE 22

Adjustment Risks and Policy Uncertainty Are High

Continuing economic adjustment leads to a shift in the structure of the economy and heightens risks to financial stability and fiscal sustainability. Long-term shifts are part of Russia’s dual transformation: a rapidly aging population and diminishing role of the natural resource sector. Successful policies will require a combination of fiscal discipline, regulatory constraint and institutional capacity building.

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SLIDE 23

Thank you!

For more information about the World Bank and its activities in the Russian Federation, please visit: http://www.worldbank.org/en/country/russia If you would like to be access our Russia Economic Reports, please visit: www.worldbank.org/eca/rer For questions and comments relating to this publication, please contact bhansl@worldbank.org.

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SLIDE 24

EXTRA SLIDES

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SLIDE 25

Baseline Scenario Projections

Main economic indicators

2012 2013 2014 2015 2016 2017 Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 53.0 53.0 55.0 GDP growth, percent 3.4 1.3 0.6

  • 3.8
  • 0.6

1.5 Consumption growth, percent 6.4 3.9 1.5

  • 7.5
  • 1.7

1.0 Gross capital formation growth, percent 3.0

  • 6.6
  • 5.7
  • 15.5
  • 2.0

6.8 General government balance, percent of GDP 0.4

  • 1.3
  • 1.2
  • 4.3
  • 2.1
  • 1.7

Current account (US$ billions) 71.3 34.8 58.4 97.3 90.3 76.5 percent of GDP 3.6 1.6 3.2 8.1 6.9 5.3 Capital and financial account (US$ billions)

  • 30.9
  • 45.4
  • 146.6
  • 113.0
  • 82.4
  • 67.0

percent of GDP

  • 1.5
  • 2.2
  • 7.8
  • 9.5
  • 6.3
  • 4.6

CPI inflation (average) 5.1 6.8 7.8 15.5 7.5 5.0

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SLIDE 26

Lower-bound Oil Price Scenario

Main economic indicators

2012 2013 2014 2015 2016 2017 Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 50.0 40.0 40.0 GDP growth, percent 3.4 1.3 0.6

  • 4.3
  • 2.8

0.0 Consumption growth, percent 6.4 3.9 1.5

  • 8.4
  • 3.8
  • 1.8

Gross capital formation growth, percent 3.0

  • 6.6
  • 5.7
  • 20.6
  • 5.1

3.2 General government balance, percent of GDP 0.4

  • 1.3
  • 1.2
  • 4.6
  • 4.0
  • 2.9

Current account (US$ billions) 71.3 34.8 58.4 97.8 97.7 90.3 percent of GDP 3.6 1.6 3.2 8.3 8.5 7.1 Capital and financial account (US$ billions)

  • 30.9
  • 45.4
  • 146.6
  • 112.9
  • 99.4
  • 92.1

percent of GDP

  • 1.5
  • 2.2
  • 7.8
  • 9.6
  • 8.6
  • 7.2

CPI inflation (average) 5.1 6.8 7.8 15.8 8.0 5.0

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SLIDE 27

Upper-bound Oil Price Scenario

Main economic indicators

2012 2013 2014 2015 2016 2017 Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 58.0 63.6 67.1 GDP growth, percent 3.4 1.3 0.6

  • 3.2

1.3 1.7 Consumption growth, percent 6.4 3.9 1.5

  • 7.0

2.1 2.8 Gross capital formation growth, percent 3.0

  • 6.6
  • 5.7
  • 14.7

3.5 5.6 General government balance, percent of GDP 0.4

  • 1.3
  • 1.2
  • 4.5
  • 3.2
  • 2.9

Current account (US$ billions) 71.3 34.8 58.4 81.9 68.9 50.8 percent of GDP 3.6 1.6 3.2 6.3 4.4 2.8 Capital and financial account (US$ billions)

  • 30.9
  • 45.4
  • 146.6
  • 92.5
  • 72.5
  • 42.5

percent of GDP

  • 1.5
  • 2.2
  • 7.8
  • 7.1
  • 4.7
  • 2.3

CPI inflation (average) 5.1 6.8 7.8 15.2 7.0 5.0

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SLIDE 28

Russia’s Diverging Growth Performance

Quarterly GDP growth, percent, y-o-y

  • 12
  • 8
  • 4

4 8 12 OECD Oil-exporters Russia OECD EU Emerging Other Emerging