Experts Suggest a Prolonged Economic Downturn

4 february 2016

The new social-and-economic crisis review titled Consumer Price Trends in Russia during the Economic Downturn published by the Analytical Center is devoted to inflation happening against a backdrop of a significant devaluation of the Russian ruble.

The experts contend that we can already be talking about a prolonged economic downturn during which we should carefully watch the anti-crisis policy of the Russian government and the Bank of Russia: they may implement structural changes, rely more on business even as they impose new taxes on it because spending is going to be reduced and yet no significant changes in the macroeconomic policy are expected. Prolonged economic downturns often lead to ‘downturn fatigue’ as was the case in the EU in 2009-2015. Households, companies, regional and state treasuries are subjected to hostile environmental factors and constant uncertainty. This undermines social cohesion.

As oil prices fell below USD 30 a barrel in Jan 2016, predictions of modest economic growth in Russia in 2016 turned to forecasts of a continued economic downturn. The global economy is also going through a difficult period: China’s growth is slowing down, Brazil is in recession; growth in Europe is very limited. Under the current conditions, inflation in developed nations that import oil slowed down, while prices there grew by a mere 0.2% on average in 2015. Developed nations that export oil are seeing faster rates of inflation; in Russia prices went up by a whopping 15.5% in 2015.

With high inflation and an economic downturn, workers’ income and real earnings were falling in Russia in 2015, which drove down consumer demand. Real consumption is falling very fast - in the first 9 months of 2015 it was down 9%. As unemployment remains at a relatively low level it is the decline in real household income that is serving as an adaptation mechanism helping the economy cope with the foreign trade shock (plummeting oil prices).

At the same time, the prices for services are changing slower than the prices for goods and are lagging behind somewhat. It is a similar situation to what happened in 1998 when the prices for goods almost doubled in one year while the prices for services went up by just 30%. Things unfolded in a similar fashion in 2008-2009. However, this time around, the difference between the growth in the prices for services and the prices for goods has been rather insignificant.

Experts note that rising prices for medications pose a serious problem for the poor in Russia, even though medications are not included in the official consumer price index.