The bottom is not visible: the Central Bank moved the point of decline in GDP to mid-2023

Ivan Zubov

In 2022, Russia's GDP will fall less than the Central Bank expected in July, but the pace of its recovery in 2023-2025 will also be more modest than expected, follows from the new Central Bank Monetary Policy Report. In 2022, the economy will contract by 3–3.5%, and in 2023 by another 1–4%, the Central Bank assumes, but the uncertainty remains quite high, so the probability of such a scenario, according to the regulator, does not exceed 25%. In a more negative scenario, which also has a 25% probability, the economy will not start to recover throughout the forecast period until the end of 2025.

The peak of the crisis has been moved from late 2022 to mid-2023

The decline in GDP in 2022, according to the updated baseline forecast of the Central Bank, will be 3-3.5% against 4-6% expected in the summer, but the economic recovery from sanctions shocks is being postponed - the bottom point of the decline in GDP will now fall on mid-2023 (and not on the end of 2022, asexpected in the spring), follows from the Central Bank 's Monetary Policy Report , published on November 8, which was studied by experts from the Re-Russia online publication.

At the same time, in the fourth quarter of 2023, there will be a slight increase - up to 1.5% in annual terms (in the previous report, 1-2.5% was expected). In 2024, weak recovery growth will continue (an increase in the fourth quarter will be 0.5-1.5% in annual terms), and in 2025 the growth rate of the Russian economy will stabilize in the range of 1.5-2.5%, the Central Bank predicts .

This baseline forecast assumes that household consumer incomes will decline by 3-3.5% in 2022 and remain at the same level in 2023, and recover only in 2024, including with the support of lending. Gross fixed capital formation will practically not decrease in 2022 — it was supported by previously approved investment projects, but already in 2023 the reduction may be 3-7%, since many investment projects have already been adjusted for the next years, and the budget support factor will play a smaller role as a result gradual consolidation of the budget (that is, reduction of the budget deficit). In 2024, gross capital formation will grow at a recovery pace against the backdrop of an increasingly stable adaptation of the Russian economy.

The physical volume of exports in 2022 will decrease by 15-16%, and in 2023 by another 7.5-11.5% against the backdrop of the entry into force of the oil embargo. In 2024, the decline will slow down to 1-3%, and in 2025 a slight increase of up to 2% is possible due to the continued recovery of non-oil and gas exports and exports of services, the Central Bank expects in its baseline forecast. The reduction in the physical volumes of imports in 2022 will be 22.5–23.5%, and in 2023 even a slight increase is possible (+0.5%; in 2024, as new trade relations develop, the recovery of imports will accelerate to 3 -5% annual growth).

The probability of falling and rising is approximately equal

However, the Central Bank itself estimates the probability of this basic scenario at 25%. The real trajectory can be both higher and lower with equal probability. In a more negative scenario, the decline in Q1 2023 will exceed 10% by Q1 2022, and in Q3 the economy will fall by 5% by Q3 2022, that is, to the current level. The economy will not move to recovery in this scenario over the entire forecast horizon until the end of 2025. This may happen if the preconditions of the baseline forecast are not met, which assumes, in particular, the price of a barrel of $70 in 2023 and $60 in 2024, maintaining the discount on Russian oil at the current level, as well as slowing down the rate of decline in Russian exports.

In addition, the risks of accelerating inflation prevail over the medium term, the Central Bank notes. Among the pro-inflationary risks (and hence the risks of the implementation of the baseline forecast), the Central Bank primarily highlights the further tightening of sanctions. Supply-side constraints could increase due to equipment supply issues and slow restocking of finished goods, raw materials and components if negative import trends pick up, the report says. Another pro-inflationary risk, according to the Central Bank, could be a global recession, which will weaken the demand for Russian oil and gas, which, as a result, will lead to the devaluation of the ruble. An increase in the labor market deficit (as a result of mobilization) may turn out to be more pronounced than in the baseline scenario, which will increase the pressure from the costs of enterprises, and high inflation expectations, especially sensitive to exchange rate fluctuations, may serve as a factor in boosting consumer demand due to accumulated savings. In addition, an additional expansion of the budget deficit may require an increase in the key rate to bring inflation back to the 4% target in 2024.

The population has already adapted, but further price increases are inevitable

Among the disinflationary risks, the Central Bank singled out the continued high propensity of the population to save in the face of increased general uncertainty, as well as the lengthy time for Russians to get used to the new supply structure in consumer markets, which may hold back demand to a greater extent and for a longer time than expected in the baseline scenario. At the same time, a faster adjustment of the economy, accompanied, among other things, by a strong recovery in imports, may help offset supply shocks more quickly, and a record agricultural harvest in 2022 may have an impact on domestic market prices even if export difficulties persist.

According to the baseline forecast of the Central Bank, inflation by the end of 2022 will be in the range of 12-13%, and the inflation dynamics in 2023 will continue to be influenced by the deferred effects of military mobilization (through a possible increase in labor flows between various industries and regions, a shortage of personnel in certain specialties and pro-inflationary wage pressures).

However, despite the fact that the economy has adapted to the changed conditions faster than expected, as the effects of inertia are exhausted (including the reduction of existing stocks and the completion of previously concluded contracts), supply shocks may become more pronounced, proving to be more stable and prolonged than previously thought. . This, in turn, may lead to higher rates of price growth. Taking into account all these factors, the Central Bank assumes that annual inflation in 2023 will be in the range above the target level and amount to 5–7%, and will return to values near the target level of 4% only in 2024.