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Inflation eating up Russians' wages

A drop in the public’s wages in September was accompanied by a growth in demand for durable goods. People tried to use this method to protect their savings from inflation. In addition, hopes for economic growth are becoming more and more illusory, as the main macroeconomic indicators are currently on the decline, experts from HSE's Centre of Development Institute said in the latest edition of New Comments on the State and Business

Consumption growing as wages declining

Russians’ real wages fell in August-September 2014. Real wages did not only fall month-on-month, but also year-on-year for the first time since the 2008-2009 crisis. After the crisis, growth rates had always remained positive.

Annual growth rates for real wages were 1.2% and 1%, respectively, in August and September versus 1.4% in July and 2%-5% in the first half of 2014.

Figure1. Change in gross real wage per person.


Source: CEIC Data, calculations by HSE’s HSE's Centre of Development Institute.

Whereas wages fell in August-September, consumption grew. Annual growth rates for consumption increased, though they continued to be rather low: 1.2%, 1.4%, and 1.7% in July-September for retail trade turnover, and 0.8%, 1%, and 1.9% for paid services.

Figure 2. Change in retail trade turnover and paid services (100 = 2012, seasonally adjusted).


Source: CEIC Data, calculations by HSE’s HSE's Centre of Development Institute.

Excessive consumption can be clearly seen behind this positive result amid the latest spout of depreciation for the ruble, the experts said. In August and September, the ruble fell by 3.5% and 7.4%, respectively, against the dollar and 1.5% and 2.7% against the euro.

The 0.2% increase in retail trade turnover in September, when the dollar’s exchange rate hit a historic maximum and true depreciation panic began, took place as a result of a 0.6% increase in purchases of non-food products – 0.3% fewer groceries were purchased in September compared with August. Aside from the ruble’s depreciation, however, a renewed programme to stimulate car sales in exchange for old vehicle recycling also played an important role. After six months of steady decline for sales, September demonstrated 4.8% growth. Additionally, around 15% of all automobiles were sold as part of this exchange programme.

In one way or another, depreciation and government stimulus are temporary factors, the authors note. They simply redistribute consumption to the near-term; that is, they minimize future demand.

Statistics support industry

Amid increased demand from the population, the economic situation is worsening as a whole. Geopolitical problems, which have been met with a drop in oil prices, do not contribute to better business expectations. Fixed investments have remained at the same low level as in August, while there was annual decline of 2.8% (investments fell by 2.5% on average in January-September).

Table 1. Change in primary types of economic activity and fixed investments (seasonally adjusted month-on-month growth, %).

 2014 г,Y-o-y 6M change Condition
Industrial Production (Rosstat)0,80,1-0,70,7-0,71,61,6weak growth
Industrial Production (CDI)10,1-0,50,3-0,11,21,6weak growth
Manufacturing0,60-0,90,5-0,51,42,3weak growth
Electricity, gas, water production and distribution  5,31,1-0,31,50,4-1,6-0,4stagnation
Freight turnover-0,11,20,5-1,3-0,20,90,1stagnation
Wholesale trade-0,40,4-0,50,2-3,2n/a-4,1Decline
Retail trade-0,20-0,20,30,20,21,7weak growth
Paid services0,30000,40,91stagnation
Primary industries, excluding agriculture0,30,2-0,20-0,60,5-0,3stagnation
Reference: investments2,10,32,4-1,3-1,60,1-2weak decline

Source: CEIC Data, calculations by HSE’s HSE's Centre of Development Institute.

In September, indicators continued their downward trend in the construction industry, falling 4.4% from September of last year and 0.4% from August. Slightly heightened transport activity (freight turnover grew 0.9% for the month when seasonally adjusted) still did not bring this sector out of its stagnant trend. A different trading activity indicator – change in wholesale trade – worsened considerably for the month, falling 3.2% from July. Thus, the situation with demand in the economy left much to be desired in September.

Conversely, statistical indicators in the production sector advanced in September. Experts saw a 1.2% month-on-month increase in seasonally adjusted industrial production in September. This positive result occurred thanks to an untraditionally sharp spike in production (1.7% month-on-month) and a 1.4% increase in manufacturing industries.

Economists nevertheless believe that the growth shown by the industry in September is not in fact a positive phenomenon. There are several reasons for this.

Firstly, strong growth in mining was, one might say, the statistical outcome of sanctions and was not accompanied by increased production volumes. In other words, a great improvement did not occur and this will be reflected in statistics for October and November.

Secondly, September’s industrial growth occurred largely thanks to government demand. Practically all industrial growth in 2014 is a result of heightened state procurements from manufacturers of watercraft, aircraft, space vehicles, and other means of transport. For the sake of brevity, economists call this state transport construction, or STC.

Thirdly, the Avtokhlam (Autoscrap) programme was relaunched in September, and around 30,000 vehicles had been sold in September as part of the programme. Because of the steady downward trend for automobile sales seen up until August and broken in September, economists estimate the net effect of the Avtokhlam (Autoscrap) programme at around 12,000 automobiles in September. The corresponding growth in production, Centre of Development experts estimate, increased the index of industrial production index by 0.1-0.2 percentage points.

Considering even the first two factors, one might say that the ‘market’ portion of industry had been stagnant for exactly two years before falling in September. It turns out that industrial growth is, to a certain extent, the result of a statistical effect and, to a certain extent, the result of government pumping (STC and Avtokhlam). In other words, the state of the economy is not improving.

Nikolai Kondrashov


October 22, 2014