The Central Bank of Russia (CBR) forecast strong growth this year, but forecast a sharp slowdown starting in 2025 as the last of the military Keynesianism effects wear off, in its medium-term outlook, released on August 21.

Growth this year is expected to be strong at 3.5-4%, possibly well ahead of last year’s surprise 3.6% growth, but as bne IntelliNews reported, the economy is cooling as the military Keynesianism factors supporting growth is exhausted and the very high 18% policy rate crushes growth.

“The 2024 forecast of real GDP growth has been revised up to 3.5–4.0%. This largely reflects new statistics on economic activity in 2024 H1 and high-frequency data as of the beginning of 2024 Q3. Moreover, tighter monetary conditions are expected to impact economic activity over the forecast period,” the CBR said.

CBR governor Elvia Nabiullina has been vocally warning that growth will be hindered as a result and in particular the end of a generous mortgage subsidy programme on July 1 will see both the housing market and construction sectors slow rapidly, which slow the economy over the second half of 2024.

The CBR forecast for growth in 2025 is for a marked slowdown to 0.5-1.5%, before picking up slightly in 2026 to 1-2% and again in 2027 to 1.5-2.5%.

“The real GDP growth projection has been reduced by 0.5 pp to 0.5–1.5% for 2025 and to 1.0–2.0% for 2026. The economy is predicted to return sustainably to a balanced growth path no sooner than in 2027,” the CBR said.

The CBR traditionally has been very conservative and errs on the side of caution so the actual results have often proven to be much better than the regulator’s forecasts, but it is clear that the Keynesianism bump from the massive war spending that makes up 8% of GDP has now run its course and will fade going into 2025.

Inflation has been a major headache and started persistently growing from the first quarter of 2023 to touch on 9.1% in July. As bne IntelliNews reported, inflation probably peaked last month as the CBR’s continuous tightening of monetary policy since last spring kicks in. But the use of non-monetary policy tools, such as tightening prudential credit rules and stamping on the housing market growth, have led to a visible slowing of growth by August that is also helping to cool an overheated economy and bring inflation down.

Separately, earlier this week the CBR released the result from the FOM inflation survey that found inflation expectations among the Russian population for the year ahead rose by 0.5 percentage points in August, reaching 12.9% -- the fourth consecutive month of increase.

Among respondents with savings, inflation expectations grew by 1.3pp to 11.5%, while in the group without savings, expectations decreased by 0.6pp to 13.9%. The proportion of respondents who reported having savings fell to the lowest level since March 2022, dropping to 34% from 41% the previous month, FOM reports.

In the medium-term forecast, the CBR predicts inflation will end 2024 at 6.5-7% and average 7.8-8% this year, before falling to an average of 4.2-5.8% in 2025 and then to the regulator’s long-standing target rate of 4% thereafter.

“The 2024 inflation forecast has been raised to 6.5–7.0%. The revision is associated with greater inflationary pressures amid the active expansion of domestic demand surpassing the capacities to ramp up the supply of goods and services. The measures taken by the Bank of Russia will curb price growth. Its rate is predicted to decrease from the 2024 H1 figures as early as in 2024 H2, with inflation dropping to 4.0–4.5% in 2025 and staying around 4% further on,” the CBR said.

Likewise, the CBR predicted that the key policy rate will be in the range of 16.9-17.4% in 2024 before falling to 14-16% next year, to 10-11% in 2026 and 7.5-8.5% in 2027.

“The forecast of the average key rate has been raised to 16.9–17.4% for 2024 and by 4 percentage points (pp) to 14.0–16.0% and 10.0–11.0% for 2025 and 2026, respectively. The revision is associated with the response of monetary policy to more persistent inflationary pressures in the economy, as there remains a considerable deviation of the Russian economy upwards from a balanced growth path. Disinflationary processes may re-emerge in the economy provided tighter monetary conditions remain in place longer than expected before. The key rate is projected to return to an updated neutral range of 7.5–8.5% no sooner than in 2027,” the CBR said in the note.

The consumer boom that has contributed to the growth will also fade away next year, according to the CBR. Russians are enjoying all-time high record disposable income growth of over 9% a year at the moment that has been fuelling a consumer boom. But that too will come to an end in 2025.

“The Bank of Russia has raised its 2024 forecast of household consumption growth by 1.5 pp to 4.0–5.0%.

Consumer activity was higher in 2024 H1 than predicted earlier. The expansion of people’s incomes was strong enough to drive growth in both savings and consumption. The continuing tightness in monetary conditions over 2025–2026 will ensure a high saving ratio, which will make consumption growth slow down and return to a balanced growth path by the end of the forecast horizon,” the CBR said.

The CBR forecasts that while household consumption grew by a whopping 6.5% in 2023 and is expected to end this year at 4-5%, consumption will fall off a cliff in 2025 with no growth at all, or at best 1% growth, as the wind is taken out of Russia’s economic sails. Over the next two years consumption will recover somewhat to 1-2% and 1.5-2.5% respectively.

The balance of payments will fare better as Russia continues to build up the new export routes, having switched from Europe to Asia.

The export of goods will improve marginally from $424bn in 2023 and $426bn in 2024 to $427bn in 2025 and continue rising at this pace over the subsequent two years. Imports in 2023 were $303bn, but are expected to fall modestly to $291bn in 2024, before recovering to $307bn, $318bn, and $331bn in the following three years respectively, leaving a health trade surplus in all years of around $100bn a year.

“Export quantities are expected to be lower than predicted earlier due to higher sanction pressures and restricted exports to individual commodity markets. However, export quantities of goods and services are expected to recover in the future, as has been projected in the April forecast, backed by the expansion of external demand and the arrangement of new export routes,” the CBR said.

The balance of services trade remains negative with Russia importing around $30bn more of services a year than it exports of the period.

“The 2024 forecast of growth in imports has been reduced significantly by 4 pp to (-3.0)–(-1.0) % owing to tougher sanctions on payments and logistics. However, the regulator expects these constraints to be temporary, with the gradual expansion of goods and services imports resume between 2025 and 2027,” the CBR said.

Taken together the current account surplus will remain positive in the period but the surplus will shrink over time. Russia ran a current account surplus of $52bn in 2023, which is expected to improve this year to $84bn, which is still down from the all-time record surplus of $230bn in 2022 in the first year of the war, due to an energy price spike that year. It is also less than the pre-war all-time record of $120bn set in 2021.

But starting in 2025 the current account surplus will begin to fall sharply to $56bn, then to $34bn and $29bn in 2026 and 2027 respectively, the CBR says, assuming that oil prices are an average of $85 per barrel this year and $80 (2025), $75 (2026) and $70 (2027).

“The forecast of the current the account surplus has been raised due to a reduction in the import projection. The current account forecast has been also impacted by a lower projection of the primary and secondary income balance due to its steeper-than-expected decline in the first half of the year caused by a drop in investment income payable to non-residents, since their equity interests in Russian companies and banks have been shrinking,” the CBR said.

“The 2026 forecast of global Brent crude prices have been raised by $5 to $75 per barrel. The reason is the anticipated growth in the world economy and the OPEC+ decisions made earlier. The forecasts for the other years have been left unchanged,” the CBR added.

CBR’s key indicators in the baseline scenario 2023-2027

CBR’s balance of payment indicators in the baseline scenario 2023-2027