Real sector of economy in the first quarter of 2016

The weakening dynamics of consumer demand was characterized by a reduction in retail turnover in March 2016 by 5.8%, and paid services — by 1.3% in annual terms.

While in the previous seven-year period the dynamic growth in incomes and consumption was supported by the increase in wages in the public and private sectors of the economy, as well as increase in demand for labor, and higher pensions, under the conditions of 2015–2016, economic slowdown and tightening of the social spending policy pose a threat to the sustainability of these trends. Under food prices growing at a faster rate than the overall inflation level, the risks to vulnerable groups increase significantly. In particular, for the first time after the 1999 crisis, the poverty rate is increasing.

Real income in March 2016 was 98.2%, and real wages — 97.0% of the corresponding values of March 2015. Food price index in March 2016 was 102.1% compared to December of the previous year, while a year earlier it was 107.4% compared to the previous year, and non-food products price index was 102.3% in 2016 against 110.9% a year earlier. It should be noted that the gradual slowdown in the monthly inflation rate is due to the weakening of the ruble exchange rate pass-through effect caused by restrictions from the comsumer demand side. Continuation of the downward trend in real income has led to structural changes in retail turnover towards increasing the share of the food market turnover. In March of the current year, the food product turnover dropped by 5.0%, and non-food product turnover — by 6.5% compared to March 2015.

Low investment demand determines the slow growth rate over the last three years, reflecting deep structural problems of the economy. The situation in the construction and investment complex is complicated by the permanent narrowing of the range of activity in the second half of 2013. The volume of construction works amounted to 98.4%, and commissioning of floor area — to 83.7% of the corresponding figure of the previous year. The situation is exacerbated by the falling rate of investment projects financing against the backdrop of the general economic slowdown and high interest rates on loans. At the same time, the investment demand is negatively affected by the impact of such factors as uncertainty, foreign sanctions, as well as decrease in private investors' confidence.

In addition, the economic situation is exacerbated by problems caused by inefficient allocation of factors of production. In the context of limited access to external financing, the problems of effective use of economy revenues, including revenues from raw materials exports, to improve the potential of growth and performance become actual. According to the forecast, the investment demand in 2016 will remain at extremely low levels, and in this case, the main factor supporting production should be more efficient use of production capacity. The shrinking share of machinery and equipment in the structure of gross fixed capital formation — due to the falling domestic production and imports of capital goods, the rising cost of imported equipment and credit resources, almost three-fold reduction in foreign direct investment — can lead to the slowdown in modernization processes and in introduction of innovative technologies that are important for increasing the potential for economic growth, in particular technologies for oil and gas extraction on hard-to-reach fields.

Reduced domestic demand determined the dynamics of industrial production and market infrastructure. The industrial production decreased in March 2016 by 0.5%; in the first quarter of 2016, it decreased by 0.6% compared to the same period last year. Structural aspects of industry functioning in the current year are determined by the preservation of positive dynamics of mining together with the decline in manufacturing. The mineral output in January–March 2016 increased by 3.4%; in March, it grew by 4.2% compared to the same period last year.

In manufacturing, the output in March 2016 will decrease compared to March 2015 by 2.8%. Positive dynamics in March 2016 in annual terms was recorded in consumer goods production and chemical production. The performance of manufacturing was determined by domestic factors. The downward trend in investment activity determined decline in production of capital goods. The downturn in the machine-building complex is quite differentiated by economic activities. The dynamics of vehicle and equipment production in the first quarter of 2016 was negatively influenced by the reduction in output of automotive industry by 16.7% compared to the same period of the previous year. The increase in production of machinery and equipment by 5.4% compared to the first quarter of 2015 can be entirely attributed to the increase in production of machinery and equipment for agriculture while the downturn in other sub-sectors is deepening.

The disturbing factor in the results of the first quarter of 2016 was an increase in the overall unemployment rate by 2.6% compared to the same period of the previous year. This is particularly disturbing considering the declining dynamics in incomes and wages. The labor market responded to this situation in the current year with the growing part-time employment that allows keeping staff and maintaining the living standard of the population. The result of this policy is the reduction of the employers' needs for workers stated in public employment services.

Olga Izryadnova — Head of the Structural Policy Department