August 27th, 2012

Russia enters stagflation?

Russian GDP contracted by 0.2% in July. In the opposite, inflation picked to 7% on the yearly basis, 1% above the government’s target.

According to Andrei Belousov, Minister of Economic Development, 6% of GDP growth is needed for social stability

New statistics demonstrate that even oil price of $114 per barrel can’t help Russian economy to grow. Within its current economic model, Russia needs not just high oil prices, but constantly growing oil prices. The reason for the July’s GDP fall was the stagnation of the net export and investments, but above all the slowdown of the households’ consumption.

To combat inflation, Central Bank of Russia might raise interest rates thus nocking the economy further down. In its turn, the increased government spending might bring nothing but the spike of inflation. Economy can be in stagflation for quite long before the government dares to break the vicious circle with the painful structural reforms.

However, the July spike in inflation could be caused by the coincidence of several temporary factors such as unusual drought, ruble’s devaluation and the utilities tariffs rise. But the GDP figure is much more serious. Most likely, the government will have to forget about forecasted 4% of economic growth, to say nothing about desired 5-6%, and fight for a mere 2%.

RIA Novosti

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