Russia’s Economy to End 2024 with 3.9-4% Growth, Defying Global Trends
Russia’s economy is expected to close the year with a growth rate of 3.9-4%, a remarkable performance considering the global economic slowdown. The country’s economy has grown by around 8% over the past two years, outpacing the 5-6% growth in the US and 1% in the Eurozone. The unemployment rate has hit a historic low of 4.4%.
The industrial sector, in particular, has seen the highest growth rate in a decade, with real wages increasing by 9%. This is an impressive feat, especially given the increasing sanctions pressure, particularly on banks that hinder import-export activities.
Experts attribute the strong growth to a surge in private consumption and investment, supported by the government’s stimulus package, high credit growth, and the highest wage growth rates in 16 years on a deficit labor market.
The Russian government has taken a range of measures to support a faster development of import substitution, including state orders, preferential financing programs, and tax incentives for the processing industry.
However, even a high growth rate can have negative consequences. Inflation, for instance, is expected to rise to 9.3% by the end of the year, prompting the central bank to maintain a tight monetary policy and increase the key rate to 21% by the end of the year.
The high interest rate has already shown its effects, with the economy’s activity slowing down in the fourth quarter, and this trend is expected to continue in the first half of 2025, according to experts.
The high interest rate, together with the tightening of credit conditions and labor shortages, has led to a decline in investment, with the growth of investment in the first three quarters of this year slowing down significantly.
Experts believe that the main reasons for the stagnation of investment are the strictest credit conditions in the history of the survey, which are a result of the central bank’s ongoing tightening of monetary policy, labor shortages, and problems with the delivery and payment of production imports due to sanctions.
Despite the high interest rates, expensive private loans, and high deposits, consumer demand has not been significantly curbed, supported by rising wages, “military” payments, and increased inflation expectations, according to experts.
The industry, however, continues to see a record growth, particularly in sectors linked to state defense orders and large-scale trade.
The production of the mining industry is declining, mainly due to the restrictions on oil production and exports within the OPEC+ policy coordination and the difficult situation in the coal industry, where production volumes are decreasing and losses are piling up, experts say.
The construction of new housing has also stagnated, and the volume of goods transportation has declined. The volume of housing construction in Russia, which reached a historic high in 2023, declined by 9.5% in August and by 10.5% in November compared to the same period last year.
The stagnation is explained by the decline in housing demand due to the scrapping of the program for mortgages at preferential rates of 8% from July, the tightening of criteria for the allocation of family mortgages, and the flood of market loans, experts say.
Companies are feeling the pinch of the high key rate, with credit to businesses declining for the first time since November.
“The increase in the key rate to over 20% (the highest level in the last 20 years) was not anticipated by companies at the beginning of the year and is already being strongly felt” experts say, citing a survey by the central bank in November, which found that companies have reported a noticeable increase in costs and a shortage of raw materials in several industries, problems with payment circulation, and the need to settle accounts with partners under the conditions of partial or full prepayment.