Macroeconomic News

20.12.2013 20:09 Russia`s people problem The Russian government expects the economy to expand a measly 1.4 percent this year (less than half of the growth the US is likely to see) and long-term growth estimates have been trimmed to 2.5 percent a year. Much of that is down to the lack of reform which has left many big companies in the state`s (generally wasteful) hands, weak rule of law that deters investment and capital flight to the tune of tens of billions of dollars a year. Yet there is another factor that could be harder to fix - Russia`s poor demographic profile. The population started declining sharply in the early 1990s amid political and economic turmoil, falling by 3.4 million in the 2000-2010 decade, according to census data. The impact is set to be felt sharply from now on, exactly when children born in 1990s would have started entering the workforce. The consequences are already being felt. Russia will close more than 700 schools this year for lack of pupils and the jobless rate has dipped to a record low of around 5 percent, not because the economy is booming but because the country is running out of people who can take the jobs.

Russian bank VTB estimates that the labour force will shrink at the rate of 0.3-0.5 percent a year over the next decade. The demographic wave is coming into the market. For the past five years, it was not felt by companies. Now we will see the impact of the population decline as more people become pensioners and fewer young people come to the jobs market.

The growth rates of the past decade coincided with better demographics of the 1980s. So we have at least 10 years ahead that should be very painful. Russia can get around this problem to some extent by boosting labour productivity. But an average Russian produces in one working hour less than 40 percent of the output of a typical American worker, something Putin acknowledged yesterday to be a problem. Meanwhile, there was some good news on the demographic front: this year, for the first time since 1991, Russia`s birth rate is running above its death rate. 18.12.2013 12:23 The Indonesian economy clocked 5.6 per cent growth in Q2 2013-2014 Indonesia which replaced India as the second fastest growing economy in the world a few years ago, continued to grow faster than India in the second quarter of 2013-14, despite its economic growth rate standing at a four-year low. India`s growth rate in Q2 of 2013-14 stood at 4.8 per cent, sub-five per cent for the fourth quarter in a row. Compared to this, the Indonesian economy clocked 5.6 per cent growth in Q2, which was the weakest in four years. Indonesia`s economy rose 5.8 per cent in the first quarter of 2013-14. India`s economy, on the other hand, picked up pace from a four-year low of 4.4 per cent in the second quarter of the current financial year. Indonesia`s economy was hit by weak exports and a low consumption level due to high inflation. Indonesia`s inflation stood at 8.32 per cent in October.

14.12.2013 18:47 Italian Economy Stops Contracting in the third quarter Italy finally pulled out of a painful, two-year contraction in the third quarter as companies tentatively began spending again, although poor consumer confidence is likely to make for anemic growth in the near future. Italy`s gross domestic product was flat in the third quarter from the previous quarter, the best reading since spring 2011, national statistics institute Istat reported, raising an earlier estimate of a 0.1% decline. Italy`s industrial output measured by sales still shrank in the third quarter, but Istat said the sector as a whole posted 0.2% growth, reflecting investments and replenishing warehouses. Fixed investments, in physical capital such as information technology or tractors, in Italy were down 5.1% from a year earlier, but that is the best reading since the country adopted austerity policies in late 2011, according to Istat. Italy had a steep recession - conventionally defined in Europe as two or more successive quarters of economic contraction - in 2009, quickly followed by a long period of stagnation. As a result, Italian GDP has now shrunk a total of 7.3% from five years ago, while fixed investments are down 24%. Some indicators, such as bank loans and the unemployment rate, are still worsening in the fourth quarter.

The government says it will achieve 1.0% growth in 2014, a rate that will almost double in the following years. Some of the emerging underlying trends support that, and companies have long overdue investments to make. 13.12.2013 20:06 IMF says Russian economy at risk from oil markets The International Monetary Fund said there were risks to the health of the Russian economy because of its heavy reliance on the oil industry. Antonio Spilimbergo, an economist with the IMF, said he was concerned about the health of the Russian economy following a week-long visit to the country. In a statement following his visit, Spilimbergo said growth in the Russian economy had slowed down and vulnerabilities persist. Inflation remains in check, however, and the economy is moving at its full capacity despite a slowdown in the growth of the Russian gross domestic product.

He said the budget was further influenced by the weak performance of sectors outside the oil industry. "Structural reforms should be a critical element of any plan to enhance Russia`s growth potential," Spilimbergo said. 10.12.2013 15:23 India GDP expands 4.8% in second quarter India`s economic growth accelerated in the fiscal second quarter, spurred by higher output in both industry and agriculture and a rebound in exports, suggesting that the economy has bottomed out. Gross domestic product (GDP) expanded 4.8% in the three months ended 30 September, compared with 4.4% in the preceding quarter, data released by the government showed. Agriculture grew 4.6% compared with 2.7% in the first quarter.

Electricity production increased 7.7% against 3.7% during the same period. But growth in community, social and personal services, indicative of government expenditure, slowed significantly to 4.2% from 9.4% in the June quarter. The finance ministry expects GDP to grow 5-5.5% in the fiscal year to next 31 March. The economy grew 5% in the last fiscal year, the slowest pace in a decade, as companies put investments on hold and consumers cut back on spending in the face of high borrowing costs. Delays in mandatory government approvals hurt company cash flows, stalling projects. Economic affairs secretary Arvind Mayaram said the third and fourth quarters will see a pickup in growth to help attain a growth rate of at least 5% in the full fiscal year.

09.12.2013 18:21 Brazil Economy Shrinks More Than Forecast on Investment Fall Brazil`s economy shrank in the third quarter more than analysts forecast as above-target inflation, deteriorating fiscal accounts and rising interest rates sapped confidence and crimped investment. Brazil`s gross domestic product fell 0.5 percent in the July to September period from the previous three months, the biggest drop since the first quarter of 2009, the national statistics agency said today in Rio de Janeiro. The drop was larger than forecast from 38 economists surveyed by Bloomberg, whose median estimate was for a 0.3 percent drop, and follows a revised 1.8 percent gain in the second quarter. On an annualized basis, the third quarter decline was 1.9 percent.

Investment in the third quarter dropped by 2.2 percent. The decline shows the government artificially stimulated the economy in the second quarter and the impact was not lasting, according to Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA. “The government expected that by giving stimulus to specific sectors, positive sentiment would spread out,” Rostagno said by phone from Sao Paulo. “You can clearly see that didn`t happen.” Growth in the world`s second-biggest emerging market will accelerate this year to 2.5 percent from a revised 1 percent last year, according to analysts surveyed by Bloomberg. That would be less than one-third China`s rate and about half of India`s. The analysts forecast a 2.4 percent expansion in 2014. 08.12.2013 12:52 The Return of Stagnation In early November, the Russian government released its latest macroeconomic forecast. It could not have been an easy decision. Whereas President Vladimir Putin and his government campaigned in 2012 on a promise that the Russian economy would grow from 5 percent to 6 percent a year during his six-year term, the growth rate is now expected to average just 2.8 percent from 2013 to 2020. Economic Development Minister Alexei Ulyukayev explicitly acknowledged that achieving the targets set by Putin "will take longer.

" In some cases, that means much longer. Russia`s ruling elite understands very well that reforms are needed. The problem is that the reforms needed to achieve such growth - fighting corruption, protecting property rights, privatization and integration into the global economy - threaten the elite`s ability to hold on to power and extract rents. For those in power, a big piece of a shrinking pie is preferable to no piece of a growing one, which is what most of the current elite would receive under a fair legal system with clear rules and predictable enforcement. The growing realism of the government`s internal and public discourse is no small matter. It is finally leading, for example, to the much-needed discussion of budget cuts. What this and officials` new candor mean more broadly for Putin`s political future remains to be seen.

06.12.2013 18:59 Will the stagnating economy bring about much-needed structural reform? Throughout the 2000s, the Kremlin funneled profits from oil and gas into the rest of the economy, largely through state-led investment projects and increases in wages and pensions. Consumption soared. Spare industrial capacity left over from the Soviet era meant that firms did not have to invest to produce more. They could simply unlock capacity that had been sitting unused. That model is now outdated.

High prices for hydrocarbons will not solve this, because the economy has now “adapted” to expensive oil. Future growth will require investment in new technology as well as gains in efficiency and labour productivity. The trouble is that Russian businesses cannot compete on quality either, since they are not investing in technology and equipment. This is related to the uncertainty of the business climate and the attractiveness of imports thanks to the strong rouble. The lack of opportunities has led to capital flight. An underdeveloped financial system offers no efficient way to channel surplus savings to the small and medium-sized businesses that need them. Even without meaningful structural reform, Russia`s low government debt and high reserves mean that the state could buy itself a minimum level of social - and thus political - stability for some years to come.

But it will be more vulnerable than ever to outside shocks. The oil price at which Russia can finance budgeted spending without borrowing has increased from just $34 a barrel in 2007 to above $100 for the years ahead. The hazard of stagnation is the “lost opportunity” to make the economy more robust. A large downward lurch would leave the Kremlin with less freedom to act than it has now. The good news for Russia is that Mr Putin does not need to spend a lot of money to make the financial system more efficient or the state`s role in the economy less heavy-handed; but the bad news is that he has to embrace “a new idea of how to structure the economy”. 04.12.2013 12:49 The Economy Ministry of Russia cut its 2013-2015 gross domestic product growth forecast The Economy Ministry of Russia cut its 2013-2015 gross domestic product growth forecast after months of data pointing to stagnant corporate investment as well as declining growth in consumer demand.

The revisions, a few weeks after Russia admitted for the first time that its economy would lag global growth over the next two decades, added ammunition to arguments that Russia needs a new growth model. "Stagnation will definitely continue, with moments of recovery," Economy Minister Alexei Ulyukayev said. Despite an average price of oil, Russia`s chief export, above $100 this year, Ulyukayev said GDP was likely to grow only by 1.4 percent, compared to an earlier forecast - itself reduced - of 1.8 percent. The new forecasts envisage growth inching up to 2.5 percent next year, and 2.8 percent in 2015: down from previous forecasts of 3 percent and 3.1 percent respectively. The ministry then expects growth to average 2.5 percent over the next two decades, very modest for an emerging market more used to growth rates above 6 percent in the previous decade.

02.12.2013 20:06 Russian government embraces cluster strategy Fifty percent of the world`s economies are now using "cluster strategy" to achieve growth, and as Russia attempts to wean itself off its dependence on natural resources, it`s embracing the same this line of economic development, setting up various clusters across its vast territory. A cluster, or a group of related firms and economic institutions specializing in the same industry and located near one another, is believed to bring about synergies for small and mid-size businesses. And though the strategy has been taken up only recently, there are success stories in the oil-rich country. Some regions specialise in car manufacturing, some in pharmaceuticals, others in IT or aeronautics – many industries that are part of global trends are being developed in regional clusters across Russia. For example, there is a huge cluster in St Petersburg for light manufacturing, alcohol, and car manufacturing which is already proving very successful. They are pulling in more and more investment, because the infrastructure is there, the work force is there and everything is in place. Kaluga, a region not particularly rich in minerals in oil, or anything, has been very successful in creating business environment.

Mordovia has become a centre of Russia’s lighting industry, with plants manufacturing lighting equipment working for the benefit of the entire country, along with lighting design companies and distributors. The volume of subsidies is more or less equal and amounts to two million pounds per cluster. All of them have different models of territorial organisation, as well as various ration of science-technological activity and manufacturing capabilities. Yet, all feature high growth of production volumes, R&D potential and educational facilities based within every cluster. Clusters are a relatively young initiative but there is hope they will bring about growth of Russia’s economy in long-term. Some of the clusters across Russia have gone beyond national boundaries and can boast international cooperation – with France, Germany, Belgium, the Netherlands – to name a few. So clusters help not only to attract foreign investors but also Russian companies to go abroad, as it is easier for a business to find overseas partners if it is part of a larger entity such as a cluster.