Well as far as I can see, in this the great second depression cycling race, we now have a small breakaway “peloton” formed out there in front as we struggle to reach the Tourmalet summit, with teams from Germany, Spain, China , Russian and even Ukraine all elbowing furiously away one with another, in an attempt to snatch the yellow jersey from its current holder – Japan. But wait! A little way behind them I can now discern another, more densely packed, group, although I can scarcely make out one rider from another such is the cloud of dust thrown up by the power and fury of their effort, although from the little I can make out they do appear to be lead by “gregarios” hailing from the United States and the UK, and, no doubt about it, they do seem to be closing fast.
Yet as things stand as we go to press, one of the primary contenders for this most unusual and most meritless of awards must surely come from this years very strong Russian contingent, and it therefore shouldn’t surprise us at all to find that Russian manufacturing shrank at what was a country-specific record pace in December, with sharp drops in both foreign and domestic demand producing widespread production and job cuts, according to the latest PMI report from VTB Bank Europe.
VTBâ€™s Purchasing Managersâ€™ Index contracted for what is now the fifth consecutivemonth to 33.8, from 39.8 in November. This brings Russia swerving into line with Japan (30.8), Spain (28.5), Germany (32.7) and China (41.2) Russian manufacturing is, in fact, now contracting more rapidly than it did at any time during the 1998 economic collapse, when the government had to abandon its support for the ruble and ended up defaulting on $40 billion of domestic debt.
The malaise is general, and Russia’s RTS Index fell by 72% in 2008, making it the worst performing stock index among the worldâ€™s 20 biggest equity markets . The ruble has also been falling, and lost 15 percent against the central bank’s dollar-euro currency basket during 2008. The central bank has also now used 27 percent of its foreign-currency reserves, which are still the worldâ€™s third-largest, trying to prevent an overly dramatic devaluation of the ruble. Reserves were down to $438.2 billion by the end of the year, and more than $200 billion has left the country since the August invasion of Georgia, according to estimates at BNP Paribas.
So the position in Russia is bad, of that there is little doubt, but could Russia really take over the batton from Japan, and lead the global economy downwards, surely this assertion is exaggerated, I mean it wasn’t so long ago that they were growing at 7%, was it? Well exactly, the downturn in Russia is extraordinarily sharp (as it is in China), which is what makes the position so dramatic really, oil is down, manufacturing output is down, and a sharp credit crunch has consumer demand in the “throttle” position. Let’s look at some of the recent macro data.
Producer Prices Fall Sharply
So the ruble is falling and the reserves are flowing out at a rather fast rate, but this is not producing inflation in Russia – in fact quite the contrary, disinflation is very strong in Russia right now, and indeed if things continue at this rate (especially given the sharp contraction in internal demand) deflation and not inflation is going to be the big headache. Some evidence to indicate this danger can be found in the fact that Russian producer prices – which are widely regarded as an early indicator of forthcoming inflation – fell sharply again in November, pushing the annual rate to its slowest pace since March 2007 as demand for material for industrial production weakened rapidly. The cost of goods leaving Russian factories and mines fell 8.4 percent between October and November, while the year on year rate of increase dropped to 4.2 percent as compared with the 17.4 percent y-o-y rate registered in October.
The November fall follows a 6.6 percent monthly drop in October, and it is clear that the rate of disinflation in producer prices is extraordinarily rapid, and it may be that we will soon enter outright price deflation. The biggest difficulty is the almost complete lack of control by anyone in authority and the with tecnical expertise to adequately handle macro economic management, whether on the upside or the downside. This is quite simply all terribly dramatic.
Consumer price inflation is also slowing, and was down to 13.8% in November, from 14.2% in October. Russia’s consumer price inflation rate was running at 0.1 percent in the week between December 9 and 15, according to the Federal State Statistics Service. Inflation was thus 0.3 percent for the month to date and 12.9 percent for the year to date, compared to 0.7 percent and 11.4 percent in the same periods in 2007. So disinflation is already well at work even in consumer prices. Still, these are very – unacceptably – high numbers, and those who so willingly acquiesced in them earlier will now feel the downside of their negligence, although unfortunately it is – as ever – the poor old Russian in the street who will really pick up the bill.
Rapid Economic Slowdown
More evidence for the rapid velocity of the economic slowdown is provided by the index of key economic activities, which has fallen back from a year on year high of 10.7% in April to a 2008 low of 2.6% year on year in October. This would seem to indicate that the economy may well have been contracting month on month between September and October, although as with much of the data which follows we do not have a lot of systematic access to direct month on month comparisons to be able to closely scrutinise what is happening.
Another short term measure of economic activity we have available – industrial production, which is responsible for about 40 percent of Russian GDP – contracted at a year on year rate of 8.7 percent in November, the fastest rate since the 1998 financial collapse. As a result Russiaâ€™s Economy Minstry now forecast that the eonomy may contract in the first two quarters of next year, and full year growth of 2.4 percent in 2009.
My feeling is that these estimates may well be too high, and that the economy may well already be contracting in Q4 2008 (in fact Deputy Economy Minister Kelpach more or less admitted that this was the case in a recent slip of the tongue), so we could easily see an outright GDP contraction in 2009 both in real terms and, much more seriously, in nominal terms (if we hit price deflation, everything depends on how fast the authorities let the ruble devalue). A contraction in nominal GDP would be very hard for the Russian authorities to handle – since we would be into using unconventional tools in an economy where policy managers have not yet learnt to satisfactorily use conventional ones. Month on month industrial output was down 10.8%.
Unemployment is also rising, as are overdue wages, which were up 93% over the previous month. The unemployment rate rate rose to 6.6 percent in November, which is the highest since April, but still comparatively low by historic standards, although experts suggest we could easily see this number rise towards 10% to 11% in 2009.
The total number of unemployed reached 5 million people, compared with 4.624 million in October, or 6.1 percent, according data from Rostat. Wages, however, are still rising at this point, and the average monthly wage rose an annual 7.2 percent in November to 17,995 rubles, while real disposable income fell 6.2 percent.
Russian retail sales also slowed in November and sales increased at an annual 8 percent, still quite strong, but down considerably from a revised 12.4 percent in October. Still this is the slowest pace of expansion since November 2003 and more significantly sales fell 3.4 percent from October. Retail sales have increased at an average annual rate of about 13 percent since 1998. However these have to a large extent been fuelled by unsustainable wage rises, and large scale consumer borrowing. Loans to individuals rose 58 percent in 2007, reaching 2.97 trillion rubles ($110 billion) as of 1 January 2008.
Capital investment has also been slowing, and growth was down to an annual 3.9 percent in November, the lowest rate since January 2005, according to the statistics office. Investments grew 6.9 percent in the previous month.
So an incredible trifecta – a unilateral decision to recognise Georgia’s two separatist regions, a 66 percent fall in oil prices and the worst global financial crisis since the Great Depression – has been whisked up, and has lead to a sharp spike in investor unease such that around $211 billion has been withdrawn from Russia (estimate by analysts at PNB Paribas) since that fateful day in August when the tanks went though roaring through the Roki tunnel. We now await to see just how sharp “sharp” means when we are talking about the slowdown in Russian GDP in 2009, although the real questions which must be in everyone’s minds must relate to the future beyond 2009. If the ruble devaluation produces – as seems likely – a rise in corporate and household defaults on forex loans, just how long will it take Russian consumption and Russia’s banking system to recover from the blow that this will represent? And when oil prices do eventually recover (in 2010?) just what will the Russian central bank and those responsible for economic management have learnt from this most unfortunate “boom-bust” episode.