Recently, Rosstat published economic indicators for July and 7M2023. According to the Ministry of Economic Development, with the exception of the seasonal factor in July, GDP accelerated growth to (+0.5% SA) compared to +0.1% SA in June, and in annual terms, GDP growth in July is estimated at 5.0% YoY (June +5.7% YoY) and for 7M23 - 2.1%. Rosstat published a preliminary estimate of GDP growth for 1H23 – it was 1.6%, while previously published estimates for the 1st and 2nd quarters suggested a lower estimate of growth for 1H23 (1.4%). Tension in the labor market is growing, unemployment has updated the historical minimum of 3.0%, which supports the competitive wage race (for the third month in a row, they show double-digit growth in real terms). In July, the growth of consumer demand accelerated, primarily due to retail trade in non–food products, which can be attributed to the expansion of lending and an increase in inflation expectations of the population against the background of the acceleration of the weakening of the Russian national currency. Meanwhile, the growth of consumption of paid services is slowing down.
The dynamics of cargo turnover of transport has improved. Industrial production stagnated (mainly due to a reduction in mining), growth in construction slowed down, and in agriculture output decreased in annual terms for the first time in a long time, which may be due to the high base of last year. According to the monitoring of enterprises (CB), in August, the current estimates of enterprises for production became negative for the first time since February. Among the factors limiting the output, companies often noted a shortage of personnel (mostly working specialties), a significant increase in production costs, as well as the lengthening of delivery times due to logistics difficulties. Thus, despite the growing demand, many enterprises can no longer cope with the increase in output, and one of the key limitations is called a personnel shortage. In the conditions of intensifying competition for workers with the public sector, business is forced to raise salaries – those who can, will "beat off" this in rising prices, those who cannot – will reduce profitability, and then, perhaps, will leave the market.
Investments in fixed assets showed unexpectedly strong dynamics in 2Q23 (+12.6% YoY). The share of budget funds in the structure of funding sources is growing (16.7% in 1H23 versus 15.6% in 1H22). Accelerated growth in fixed capital investments and consumption of non-food products are a factor of increased import demand in recent months. This indirectly confirms the Central Bank's assessment that the weakening of the ruble is a symptom of overheating of domestic demand, which is reflected in a stronger growth in imports than the current export capabilities of the economy allow. Although, in our opinion, there are other reasons for the weakening of the ruble (a decrease in the share of "hard" currencies in the export structure, a reduction in the depth and liquidity of the domestic foreign exchange market, continued capital outflow).
Data for 7M23 show the momentum gained in the acceleration of the economy, supported by the growth of government spending, lending and an unbalanced labor market. Against this background, our forecast of GDP growth this year by 1.7-1.8% may be exceeded. The effect of a significant increase in the Central Bank's key rate (up to 12%) and the expected reduction in budget momentum should lead to a slowdown in demand growth and a cooling of the "overheating" economy. However, this effect may manifest itself closer to the end of the year and in 2024. If the operational data do not show a tightening of monetary conditions, which could slow down the growth of domestic demand, it is unlikely to expect an early reduction in the Central Bank's key rate, and it is even impossible to exclude its further increase.
As we wrote earlier, in July, the growth of industrial production slowed down in annual terms to 4.9% after 5.8% in June (revised estimate, the previous estimate for June was an increase of 6.5%). Compared to the previous month, taking into account the seasonal and calendar factors, industrial production has been slightly reduced for the second month in a row (-0.1% MoM SA).
Consumption continues to accelerate
According to the Ministry of Economy, the total turnover of retail trade, catering and paid services in July increased by +1.1% MoM SA (seasonally adjusted) after +1.0% MoM SA in June, and in annual terms the growth increased by 9.1% YoY (June: +8.9% YoY) and 2.9% above the level of July 2021.
According to Rosstat, retail trade turnover in July increased by 10.5% YoY, exceeding the consensus forecast (+9.5% YoY) and accelerating compared to June (+10.0% YoY). For food products, retail trade turnover in comparable prices slowed to 3.8% YoY (against 5% YoY in June), for non-food products accelerated to 17.2% YoY (June: +15.1% YoY, May +13.9% YoY). Retail trade turnover in July, according to our estimates, exceeded the level of 2 years ago, and the backlog for non-food products decreased to -0.3%.
In our opinion, the acceleration in the growth of consumption of non-food products could be triggered by an increase in inflation expectations of the population against the background of the accelerated weakening of the ruble. This was also facilitated by the expansion of retail lending – as the Ministry of Economic Development notes, in July retail lending increased by 18.3% YoY compared to 17.4% YoY in June, and in monthly terms, excluding seasonality, growth practically remained at the same level +1.6% MoM SA (+1.7 MoM SA in June).
The growth of the paid services market continues to slow down in annual terms – to 4.7% YoY after 5.0% in June (the estimate was raised from the initial 4.6% YoY) and May 5.7% YoY. The growth of turnover of restaurants, cafes and bars in July in real terms also slowed down to 11% YoY after +12.2% YoY in June.
Consumption is supported by the accelerating growth of wages of the population, which is based on a record shortage of labor, deferred demand, as well as high growth rates of retail lending.
Labor market – tensions are rising
The unemployment rate in July updated the historical minimum and reached 3.0%. The reduction in the number of unemployed population is accompanied by an increase in the number of applications from employers; thus, the load of the unemployed population per 100 declared vacancies has updated the historical minimum, falling below 30%. For comparison, in July last year it was 44%, in July 2020 - 222%.
The number of people employed in July reached a maximum (74 million people), the number of unemployed people at a historical minimum. Meanwhile, according to Rosstat, in the second quarter of 2023 in organizations (without small businesses), the number of retired employees of organizations exceeded the number of accepted employees by 377.9 thousand people. At the same time, the level of underemployment in 2Q23 did not decrease compared to 1Q23. In the second quarter of 2023 3.3% of the registered number of employees of organizations (excluding small businesses) worked part-time at the initiative of the employer or by agreement between the employee and the employer. In 1Q23, their share was 3.2%.
Labor market - supply and demand
The growth of the average accrued salary in June (Rosstat discloses these data with a lag of 1 month) was +14.1% YoY, only slightly slowing down compared to 16.1% YoY in May, and in real terms for the third month in a row remains double–digit - 10.5% YoY after 13.3% YoY in May and 10.4% YoY in April. This is close to the maximum growth rate of real wages since 2008. It is worth noting that they are partly explained by the statistical effect – annual inflation in May-June was still below 4%, whereas, judging by the operational data of Rosstat, on August 28 it already exceeded 5% YoY and, according to the Central Bank forecast, will continue to grow (up to 5-6.5% at the end of the year). The acceleration of inflation will lead to slower values of real wage growth, but still this year the dynamics is expected to be very high. In 1H23, the average salary increased in nominal terms by 12.7% YoY, in real terms – by 6.8% YoY.
The maximum growth rates of salaries in 1H23 in annual terms were noted – in the production of clothing (+28.3% YoY), in industries often associated with the production of military products: the production of finished metal products, except machinery and equipment (+22.4% YoY), the production of computers, electronic and optical products (+22.6% YoY), production of electrical equipment (+24.2% YoY), production of other vehicles and equipment (+21.9% YoY).
Investment
Rosstat data showed unexpectedly strong growth in fixed capital investments in 2Q (+12.6% YoY after +0.7% YoY in 1Q23). In the structure of financing sources in 1H23, the share of budget sources increased (16.7% vs. 15.6% in 1H22), while the share of bank loans decreased (to 9.9% vs. 12.7%). In 2022, the share of budget sources of investment financing reached 20.4% (the maximum since 2009). By type of investment, as before, the main share falls on investments in non-residential buildings (45%) and investments in machinery and equipment (34.6%). In the sectoral structure of investments, we can note a reduction in the share of mining (to 20.7% from 21.7% in 1H22), manufacturing (17% vs 17.7%), agriculture and forestry (3.1% vs 3.5%), construction (2.7% vs 4.0%), trade (2.7% vs 3.2%) – i.e. most of the basic sectors of the economy. The share of investments in transportation and storage (17.6% vs 16.8%), IT and communications (4.4% vs 4.0%), financial and insurance activities (3.3% vs 3.0%), real estate transactions (6.6% vs 5.8%), professional, scientific and technical activities (5.8% vs 5.4%), public administration and military security (2.0% vs 1.8%, in absolute terms an increase of almost 75%), education (2.2% vs 1.8%).
The freight turnover of transport reduced the annual decline to -0.9% YoY compared to the revised -1.0% YoY in June, which is due to the acceleration of the growth of freight turnover of rail transport and road transport. Pipeline transport continues to show negative dynamics (pipeline gas exports to Europe), although the decline in annual terms continues to slow down.
Positive dynamics remains in construction (however, growth slowed to 6.5% YoY against +10% YoY in June and +13.5% YoY in May). In agriculture, the dynamics shifted from a slowdown to a decline (-3.2% YoY after +2.6% YoY in June). The Ministry of Economy explains this by the effect of a high base due to the record grain harvest last year. However, farmers complain about the shortage and increase in the cost of fuel during the harvesting.
