Consumption is back as a driver for the Russian economy, but it is not strong enough to fuel another boom

“In 2017, household consumption was an important driver of economic growth,” according to Sberbank analysts who expect consumption to continue growing 1-2 pp faster than GDP in the coming years. Nominal wages have been rising for several years, but in January the more important real disposable income – the money left over after utilities and food spending – went back into the black for the first time in several years. “Consumption is being driven by a recovery in real disposable income and a reduction in inequality,” Sberbank said in a note.

Rising wages are the most important driver of household income. The share of official and unofficial wages in household income was 65% in 2017, while social transfers, the second biggest source, accounted for 20%, according to Rosstat.

The falling size of the working population thanks to the demographic crisis in the 1990s will also push up wages and so support consumption for the Russians that are left.

Russia’s natural population has been growing in the last few years thanks to a rising birth rate and falling mortality, but it reached peak at the end of 2017 and now is expected to shrink again modestly for several years as the dent in the population size from the 1990s works its way through the distribution curve.

“The amount of people of working age will continue shrinking. They will be replaced in the labour force by people beyond the working age and migrants. Another trend is that the labour force itself is becoming more qualified and better educated. As the demand for labour remains strong, wages should continue to grow at a fast pace,” Sberbank said.

More encouragingly the increase in wages will also undo some of Russia’s income inequality – one of the highest in the world. The Gini coefficient – which is a broader measure of wealth than just per capita incomes as it takes things like property ownership into account – reached a high of 42.2% in 2007 and has moderately declined since then to 41.2% last year.

An important driver of this is shrinking inequality in wages is Russia’s record low unemployment rate, which was 5.2% of the population in January.

The Kremlin is hoping to play into the economic recovery that appeared last year and President Vladimir Putin unveiled a very ambitious plan reform plan during his state of the nation speech on March 1.

The president wants productivity growth to accelerate to 5% per year (since 2009, the average growth was only 1%) during the next decade, the share of SMEs in GDP to go up to 40% (from the current level of 20%), the number of people employed in SMEs to go up from 19mn to 25mn people, and to halve the number of people living below the poverty line (currently 13.8% of the population or 20mn people).

The programme captures much of the “Plan K” recommendations by former finance minister and co-head of the presidential council Alexei Kudrin.

These policies should also lead to a reduction of poverty and stimulate income growth for the poorest quintile of the population in coming years, believe analysts with Sberbank. “This would be supportive for consumption, as the poor have the lowest savings ratio and their additional income should be almost fully put toward consumption,” Sberbank said in a note.

The real income of the population decreased by 7% in January 2018 y/y, according to Rosstat, thanks to a one-off RUB5,000 payment to pensioners to compensate for a decision to cut indexation to below the inflation rate.

Earlier the Federal State Statistics Service published data on revenues without taking this payment into account for "comparability" of data, which caused criticism of a number of economists. Taking into account the payment, incomes decreased by 7%, Rosstat cites the recalculated data.

"Taking into account this payment, the real disposable cash income in January 2018 relative to January 2017 was 93%," Rosstat said.

Taking out the pension present then real disposable incomes in January 2018 were flat y/y – the first time they did not shrink for several years.

In nominal terms, excluding payments, average incomes in January 2018 increased by 2.9% to RUB23,534 -- and taking into account the payment - fell by 3.5%.

In general, in 2017, contrary to the forecast of the Ministry of Economic Development, the real incomes of the population declined for the fourth consecutive year by 1.7%; in 2016 they fell by 5.8%, in 2015 by 3.2%, and in 2014 by 0.7%. But in 2018, the government expects real income growth of 2.3%.