The Russian economy continued to grow in 2021 Q1. This is confirmed by statistics for January and February, as well as the movements of high-frequency indicators in March. The continuing lending expansion significantly supports the increase in consumer and investment activity. The expansion of production activity continues but is constrained by a shortage of components and logistics problems.
In March, inflationary pressure remained elevated, including due to the effect of persistent supply- and demand-side proinflationary factors. Accommodative monetary policy and fiscal measures continue to support economic activity and domestic demand, including through the increased demand for loans. The recovery of the global economy positively influences the dynamics of Russian exports and the related industries, and also leads to an increase in prices in global commodity markets. In this context, the effect of stable inflation factors will weaken, albeit gradually, which calls for switching to neutral monetary policy. As a result, the return of annual inflation to 4.0% will be delayed until the first half of 2022, reads the recent issue of the Bank of Russia.
The authors of the issue emphasized fixed capital investments, which was in active recovery phase. “Fixed capital investments dropped less in 2020 than economic activity in general. Capital-intensive industries and services accounted for the main decline in investments.”
Broken down by the size of enterprises, investments declined the most in the small business, which has a lower safety margin and is widely represented in the services sector most affected by the pandemic.
The structure of fixed capital investments in 2020 maintained a positive long-term trend towards an increase in the share of the most productive components: investments in machinery and equipment and in intellectual property.
Investments reached their lowest level in the second quarter and started to recover a little later than consumption. However, since the end of 2020, investment activity has been rising quickly, having exceeded the level during the pandemic. This is confirmed, among other things, by the stable growth of investment imports, the acceleration of investment goods producer price growth, and the information of high-frequency indicators in early 2021.
“Steady growth of medium- and long-term corporate lending will support businesses’ investment demand in the future. At the same time, high uncertainty, cases of administrative regulation in some sectors, a decrease in budget support, as well as the remaining reduced investments in the mining and quarrying industries (due to the OPEC+ deal) will contain further rapid investment growth after the completion of the active recovery growth phase,” says the report.