IMF has good reasons for announcing that Russian economy is facing the onset of a recession
Late in April 2014, Head of International Monetary Fund in Russia Antonio Spilimbergo officially announced that the Russian economy had entered a recession phase.
Additionally, another downgrade of the IMF’s projection of Russia’s GDP growth rate in 2014 to 0.2% from 1.3% y-o-y, and to 1% from 2.3% y-o-y in 2015.
Furthermore, the IMF Head also noted that the Russia’s growth projection is at risk of being revised towards further downgrade.
As a reminder, to date, Russia’s official authorities haven’t yet recognized the onset of a recession. For instance, Minister of Economic Development A. Ulyukayev noted in the middle of April that Russia’s GDP grew up 0.8% in Q1 2014, whereas, net of the seasonal factor, Q1 2014 saw a decline of 0.5% relative to the corresponding period of 2013. Previously, the Federal State Statistics Service (Rosstat) published the results of revised economic growth rate in 2013, which show that since Q2 2013 the Russian economic growth has been accelerated, not falling. Additionally, it was pointed out that the revision of data was based on the base fact, in other words, the GDP growth figures depend on a compared period.
At the same time, in our opinion, the situation in the Russian economy isn’t driven by overall GDP growth rate figures, but rather the dynamics of its components, namely the structural component, the foreign trade component , and the cyclical component. In particular, analysis of changes to the structural component of economic growth rate in Russia which is driven by fundamental growth factors (spare production capacities and labor force, and, if the foregoing are unavailable, the Total Factor Productivity ( TFP)), shows that this component , according to our estimates, dropped to 1/8% from 5% (see the figure below) in the period of 1999 thru 2014 (given the most resent official projection of the Ministry of Economic Development, namely a 1.1% growth relative to 2013).
- GDP actual growth rate - GDP growth rate’s structural component
* Ministry of Economic Development’s socio-economic development projection in Russia. Data source: Gaidar Institute’s estimates based on the data supplied by the Rosstat and IMF.
Fig. 1. Russia’s GDP actual growth rate and its structural component, % y-o-y, 1999-2014*
The decline in the structural component of the economic growth rate in Russia can in our opinion be explained by lack of growth in labor and capital (in other words, the structural component changes only through changes to the TFP) and the Russian economy’s entrance into a new business cycle after overheating ended up in the crisis of 2008-2009 (it should be noted that the foreign trade component driven by deviation of the actual price of crude oil from the long-time average annual, in 2013 and 2014, , is about 1% while the cyclical component is -1.98% or -1.59% respectively, according to our estimates).
Therefore, in our opinion, in identifying a recession in the economy, one should rely not only upon official statistics, but also changes to the growth components driven by both the above listed growth factors and specific factors (external trade conditions is the factor for Russia). Analysis of the dynamics of such components of growth in Russia shows that the Russian economy has been ailing for at least several years (rather than quarters).
Maria Kazakova, Ph.D. in Economics, Deputy Head of International Center for Budget Sustainability Study