Russia Economic Report Nov 2007: Robust Growth, Short-Term Challenges

Russia Economic Report November 2007

Main Messages ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Rapid Output Growth Driven by Booming Domestic Demand ,[object Object],[object Object],[object Object]

Non-Tradable Sectors Continued to Boom ,[object Object],[object Object]

Manufacturing Growth: Strong But Tapering Off ,[object Object],Quarterly growth in Russia Manufacturing (relative to the same period of the previous year)

The downward trend in manufacturing might be associated with the erosion in competitiveness in non-fuel, non-metal tradable sectors ,[object Object],[object Object],Unit Labor Costs in Manufacturing Russia

Russia continues to experience an investment boom Capital investment growth, % to previous year ,[object Object],[object Object],[object Object],[object Object]

Despite Investment Boom, Domestic and Foreign Investments Went to A Few Sectors Total Fixed Capital Investment by Sector Foreign Direct Investment by Sector ,[object Object],[object Object]

Inflation is Rising, Driven by Food Prices and Monetary Factors *Data for 9 months. Source: CBR ,[object Object],[object Object]

Food prices increased, but prices of non-tradable goods and services also increased… Changes in prices of the main components of the CPI

Keeping inflation in check is becoming increasingly difficult with large capital inflows Accumulation of Foreign Reserves and the Stabilization Fund ,[object Object],[object Object],[object Object]

BoP continued recording surpluses: weaker C/A was more than offset by stronger Capital Account ,[object Object],[object Object],[object Object],[object Object]

Fiscal surpluses continue, but recently fiscal policy has become more accommodative ,[object Object],[object Object],[object Object],[object Object],[object Object],(..)* capitalization of development institutions: Bank for Development, Russian Nanotechnology Corporation, Investment Fund, Fund for Housing reform support Federal budget surplus reached 7.1 percent of GDP (9M-2007 )

Prospects ,[object Object],[object Object],[object Object],[object Object],[object Object]

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Russia has experienced a productivity surge, propelling economic growth Total factor productivity growth (5.8 percent) drove GDP growth (6.5 percent) over (1999-2005) Real income per capita (constant $2000,PPP) rose from $5,964 in 1998 to $9,650 in 2005 But capital and labor accumulation played little role in total output growth

What are the drivers of the productivity surge? ,[object Object],[object Object],[object Object]

Higher capacity utilization explains part of the productivity surge ,[object Object],[object Object],Even after adjusting for capacity utilization, TFP growth still accounts for 4.15 percent of total GDP growth (of 6.5 percent)

The productivity surge is also explained by major sectoral shifts in the economy A substantial reallocation of resources toward services Efficiency gains ‘within sectors’ had more impact on total productivity growth than cross-sector shifts Labor productivity over 1999-2004 grew by : 4.4 percent in agriculture , 4.7 percent in industry and 6.4 percent in services

Firm dynamics ,[object Object],[object Object],[object Object],[object Object]

Productivity growth came mostly from efficiency gains within firms -but reallocation & net entry also mattered Highest Productivity Growth in ICT sectors

Firm turnover plays a smaller role than in other advanced economies ,[object Object],[object Object],In advanced market economies 5-20 percent of firms enter and exit the market every year. In Russia, only about 5 percent of firms were created or destroyed during the last decade Russia -100 -50 0 50 100 150 -40 -20 0 20 40 60 80 100 Net Entry Contribution Incumbent Prod Growth

Challenges Ahead ,[object Object],[object Object],[object Object],[object Object],[object Object]

Sustaining Productivity Growth Calls For Policy Reforms that Accelerate Reallocation of Resources towards More Efficient Uses Russia has most to gain from policy catch-up

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Shrinking and Rapid Aging Population % Population Decrease, 2000-2025 % of over-65 population, 2000-2025 These demographic trends will affect labor supply : Declining and aging labor force : labor force will decline by 3 percent (about 11 million people). Over 95 percent of the decline will come from the 15-39 age group Russian population is also aging rapidly: by 2025, one person in every five will be over the age of 65 . (share of population over 65 will be 18 percent in 2025) Russia’s population will shrink by 12 percent (over 17 million people) by 2025 17 million

Aging is not a stop sign for growth: Message 1) Address labor shortage through reforms to boost productivity Message 2) Address fiscal risks associated with aging (pension, health & long care) ,[object Object],Share of growth due to higher: Labor productivity Employment rates Working-age population But growing older does not have to mean growing slower

Russia Economic Report Nov 2007: Robust Growth, Short-Term Challenges

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Russia Economic Report Nov 2007: Robust Growth, Short-Term Challenges