Economic Trends Globally and in Russia

Odd Per BrekkSenior Resident Representative

Higher School of EconomicsMarch 5, 2013

Outline of Lecture

Global Economic Outlook and Policy Challenges

Implications for Russia (I): Macroeconomic Projections and Policies

Implications for Russia (II): Sectoral and Regional Issues

The Global Economy

After an across-the-board slowdown in 2012Q2,

a slight improvement in activity in Q3 …

Global Growth(annualized percent change from previous quarter)

Source: Haver Analytics and IMF staff estimates.

Q3

5

… but real sector indicators suggest no further strengthening in Q4

Source Markit Economics/Haver Analytics, CPB Trade Monitor, IMF.

Global Manufacturing PMI(Index; > 50 = expansion; SA)

Euro Area: Real GDP Growth(annualized quarterly percent change)

Nevertheless, financial market conditions improved throughout the second half of 2012

6Sources: Haver Analytics, Bloomberg Financial Markets; and IMF staff estimates.

Source: Bloomberg, L.P. and IMF staff estimates.

10-Year Government Bond Spreads over German Bunds(basis points)

World Equity Markets(index; 2011=100)

Dec-12

World U.S.Euro Area Japan Brazil Russia India China

2013(Jan 2013

WEO) 3.5 2.0 -0.2 1.2 3.5 3.7 5.9 8.22013

(Oct 2012 WEO) 3.6 2.1 0.2 1.2 4.0 3.8 6.0 8.2

2014(Jan 2013

WEO) 4.1 3.0 1.0 0.7 4.0 3.8 6.4 8.52014

(Oct 2012 WEO) 4.1 2.9 1.2 1.1 4.2 3.9 6.4 8.5

WEO Real GDP Growth Projections (Percent change from a year earlier)

Source: IMF, World Economic Outlook.

A gradual upturn in global growth during 2013

Economic Policy Priorities

Euro area: Continue adjustment in periphery Full deployment of European firewalls Use flexibility offered by the Fiscal Compact Further steps toward full banking union and greater fiscal integration

United States: Avoid excessive fiscal consolidation in the short term

(deal fully with “fiscal cliff” and debt ceiling) Agree on a credible medium-term fiscal consolidation plan, focused on

entitlement and tax reform.

Economic Policy Priorities (ctd)

Japan: More ambitious monetary easing Adopt a credible medium-term fiscal consolidation plan, anchored by

consumption tax increases Raise potential growth through structural reforms

China: Continue with market-oriented structural reforms Rebalance the economy toward private consumption

EMDEs more generally: General challenge is to rebuild macroeconomic policy space Balance external downside risks against risks of rising domestic

imbalances

Implications for Russia (I)Macroeconomic Projections and Policies

Russia: Macroeconomic Outlook

Quarterly GDP, Private Consumption and “Output Gap”

Headline and Core Inflation(Annual rate)

Pro

ject

ed

Source: Rosstat; IMF staff estimates and projections.

2006

2006

2007

2008

2009

2009

2010

2011

2012

2012

2013

80

90

100

110

120

130

-10

-5

0

5

10

15

Real GDP (2008 Q2 = 100)Private consumption (2008 Q2 = 100)Output gap in percent, rhs scale

Pro

ject

ed

0

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16

Overall CPICore inflation (IMF estimate)

Russia: Accounting for Past Growth

Growth Rate (GDP)

Capital Stock

Labor Force

Total Factor Productivity (TFP)

2001-11 2001-08 2001-11 2001-11Real GDP growth Labor growth Investment/

GDP, in percent

(rhs)

0

2

4

6

8

10

0

5

10

15

20

25

4.8

6.4

0.6

19.6562409598446Russia: GDP growth, labor and in-

vestment

2001-11 2001-08012345678

012345678

Contributions to GDP growth (percentage points)

TFP Labor Capital

Russia: Accounting for Past Growth

Russia: Medium-Term Economic Policy Priorities and Outlook

(Real GDP Growth in Percent)

Macroeconomic stability: fiscal and monetary policy anchors

More developed and sound financial sector

Improved investment climate -8

-6

-4

-2

0

2

4

6

8

10

-8

-6

-4

-2

0

2

4

6

8

10

Baseline Adverse Reform

Russia: Fiscal PolicyFiscal Operations of the Federal Government

2006

2007

2008

2009

2010

2011

2012

2013

-15

-10

-5

0

5

10

Overall balance Non-oil balance

As %

of

GD

P

Pro

ject

ed

Fiscal Policy Stance(Percent of potential GDP)

Fiscal Balance(Percent of GDP)

2006

2007

2008

2009

2010

2011

2012

2013

-8

-6

-4

-2

0

2

4

-8

-6

-4

-2

0

2

4

Output gapFiscal impulse, + = stimulus

As %

of

po

ten

tia

l G

DP

Pro

ject

ed

Source: Rosstat; IMF staff estimates and projections.

Russia: Monetary Policy

Interest RatesExchange Rate and FX Interventions

Bank Credit Growth

2006 2007 2008 2009 2010 2011 201202468

101214161820

02468101214161820

MIACR

auction REPO

CBR fixed deposit

CBR fixed REPO

2006 2007 2008 2009 2010 2011 201228

30

32

34

36

38

40

42

-80

-60

-40

-20

20

40

60

80

Net interventions, rhsBasket rateER band

Rub.

U.S

. d

ollar

bn

.2006 2007 2008 2009 2010 2011 2012

-20

0

20

40

60

80

100

-20

0

20

40

60

80

100CorporateOverallRetail

Annual ra

te

2006 2008 2010 2012 20140

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16

Overall CPI CBR Target

Annual ra

te

Inflation: Actual vs. Targeted

Implications for Russia (II)Sectoral and Regional Issues

Russia has large regional inequality…Kore

a

Aust

ralia

Neth

erl

ands

US

France

Japan

Canada

Germ

any

Finla

nd

Gre

ece UK

Irela

nd

Pola

nd

Italy

Norw

ay

Spain

Sw

eden

Belg

ium

Aust

ria

Cze

ch

Port

ugal

Slo

venia

Hungary

India

Turk

ey

Chin

a

Slo

vak

Rep.

Sri

Lanka

Mexi

co

Indonesi

a

Russ

ia

0

0.1

0.2

0.3

0.4

0.5

0.6

Ave

rag

e G

DP

dis

pe

rsio

n

… which is consistent with its income level …

0 0.1 0.2 0.3 0.4 0.5 0.6-6

-4

-2

0

2

4

6

8

10

12

14

5.70711999999999

0.17025

-2.91934999999998

-0.98438

-3.0051

3.69639

-1.79763999999999

-0.06158

0.69745

-2.6846

-0.40906-2.4109

-2.9574

-1.92799

9.88017

-0.51205

-3.07464999999998

-0.436070000000002

-2.32887-2.85406999999998

-4.08865-3.92812

-1.59894-1.14956

10.83393

-2.06402

5.66185

-0.765980000000004

2.62253

11.58455

Average Regional GDP Dispersion, 1995-2005(Russia data is 2000-2005)

Ne

t C

om

mo

dit

y E

xp

ort

s t

o G

DP

(P

erc

en

t)

… and with its specialization in natural resources

Not much regional convergence during 2000-10 …

• Solid growth at the national level: 5-5½ percent during 2000-10

• But limited convergence of regional GDP per capita 75 percent of regions with

below average GDP per capita in 2000 have grown at sub-par rates.

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.0 1.0 2.0 3.0 4.0 5.0Avera

ge

gro

wth

during 2

000-1

0

Regional GDP per capita in 2000 (relative to national average)

Moscow

Sources: Rosstat; and IMF staff calculations.

* 79 regions, excluding Chechen.

Tumen

75%

… and economic activity remains unevenly distributed

Central district

Northwest district

South district

North-Caucasus dis-trict

Volga district

Urals district

Siberia district

Far East district

Value Added in 2010 by Russian District

Source: Rosstat

Centra

l dist

rict

North

west d

istri

ct

Sout

h di

stric

t

North

-Cau

casu

s dist

rict

Volga

distri

ct

Urals

dist

rict

Sibe

ria d

istri

ct

Far E

ast d

istric

t0

50

100

150

200

250

300

350

400

450

Russian Federation

GDP per capita in 2010

Rub. thousand

Economic policies for faster convergence

Improved macro stability at the national level Reforms to:

Improve the investment climate, particularly in lower-GDP regions

Support diversification at the regional level (smaller idiosyncratic shocks)

Enhance (further) factor mobility

Further risk-sharing through countercyclical fiscal policy at the regional level

Example: WTO accession and sectoral effects

Source: Russia’s WTO Accession: What are the macroeconomic, sector, labor market and household effects? T.Rutherford, D.Tarr, 2005

Impact of WTO Accession on Output by Sector

Mechanic

al engin

eerin

g

Food

Scie

nce

Lig

ht I

ndustry

Constructio

n m

ateria

ls

Tim

ber a

nd p

ulp

and p

aper

Pip

elines t

ransportatio

n

Agric

ult

ure

Air

transportatio

n

Constructio

n

Railw

ay t

ransportatio

n

Com

munal and c

onsum

er s

...

Ele

ctric

industry

Marit

ime t

ransportatio

n

Oil r

efi

nin

g a

nd p

rocessin

g

Crude o

il e

xtractio

n

Post

Gas

Coalm

inin

g

Caterin

g

Whole

sale

and r

etail t

rade

Tele

com

munic

atio

ns

Fin

ancia

l servic

es

Truck t

ransportatio

n

Chem

ical and o

il-c

hem

ical

Ferrous m

etallurgy

Non-f

errous m

etallurgy

-15

-10

-5

0

5

10

15

20

25

30

% c

hange

Example: WTO accession and regional effects

0

1

2

3

4

5

6

7

Welf

are

gain

as %

of

GR

P

Source: IMF staff estimates based on Regional Impacts of Russia’s Accession to the WTO, T.Rutherford, D.Tarr, 2006

Impact of WTO Accession by Region

Thank you !

Odd Per BrekkSenior Resident Representative

March 5, 2013