Cyprus Mail 2 September 2024
Russia's "overheated" economy will slow sharply next year with interest rates remaining much higher than before the war until 2027, the Russian central bank said.
The rapid growth, expected to reach 3.5 to 4 percent this year, is mainly driven by strong domestic demand from consumers and the state, which has outstripped supply, the CBR said in its annual report. He pointed out that severe labour shortages and the negative effects of Western sanctions are reducing production. The central bank's assessment highlights the challenges facing the Russian economy, despite its better-than-expected overall performance following sanctions imposed by the West in 2022. The CBR forecasts economic growth of 0.5 to 1.5% in 2025 and 1 to 2% in 2026, in line with the baseline. However, long-term growth will be hit by "restrictions on technology imports and the outflow of skilled labour", he warned.
He said the country's production capacities and labour resources have already been "almost fully utilized, with close to 80 percent utilization." Manufacturing, trade and agriculture are among the sectors facing the most severe labour shortages." Available capacity has been exhausted," CBR Deputy Governor Alexei Zabotkin told reporters on Thursday. "The pace of expansion is restrained by sanctions and physical constraints on the manufacture of means of production. The economy needs extra labour for that as well," he said, adding that labour shortages have "worsened significantly."
To address the issue, Russian firms have resorted to raising wages. In the first quarter of 2024, nominal wages in Russia increased by 19.2%. Growth slowed slightly in the second quarter to 17.4%.
Rising wages, combined with escalating fiscal spending, are fuelling inflation, which is expected to reach 6.5 to 7 percent by the end of 2024, CBR said. It also identified "obstacles due to sanctions on payments and logistics" that resulted in lower imports of goods into Russia.
The CBR forecasts inflation to fall to 4 to 4.5 percent in 2025 and stabilize at around 4 percent thereafter. Throughout this period, the CBR's key interest rate is expected to remain in double digits, a significant shift from pre-war levels when it did not exceed 9.5% for many years.
