AEB & World Bank Briefing
The UK Embassy and the Association of European Businesses hosted a top quality economic briefing by experts at the World Bank at the end of March. A surprisingly small audience was absorbed by a presentation packed with facts and thoughtful analysis, and then quizzed the speakers carefully. In a week when invited experts had vigorously slammed the Kremlin’s economic performance, the timing was ideal. Pedro Alba, WB Country Director for Russia got us going. If 2010 was the bounceback year with 4% growth led by restocking, 2011 is the consolidation phase, with 4.5% growth, increasingly driven by consumer spending. The baton was taken up by Zeljko Bogetic, lead economist. Despite the several exogenous and unpredictable shocks from The Maghreb to Honshu, world growth remains solid this year. Russia sits, fittingly, between the OECD 2% and the NIC 6% averages. With the shrinkage of 2009 almost reversed, the figures for unemployment, real wages and industrial output have proved better than many expected.
But Russia has plenty of risks. Containing inflation below the critical 10% is vital, but by no means assured. The short term spike of food and utility prices, up 17% and 25% respectively has been a major blow for the majority of Russians for whom these represent half of disposable income. A “middle class” of 55 milllion led to some sharp queries, but this figure includes many who are only just above a meanly-defined poverty line. The budget deficit appears to be a respectable 4.2% of GDP, and falling, but without oil, this would be 14%, and the Bank believes the government plan to get this in line is too timid and too slow. Public investment needs to rise sharply, but be better spent, and tighter money is essential to prevent rampant inflation. But with the presidential vote next year, the temptation for a traditional pre-election blowout may be irresistible. And the dire state of much of the infrastructure, the need for reform of public sector health and education sectors and pervasive corruption overshadow all planning forecasts.
A straw poll of the audience found a diversity of opinion. Many listeners thought that the report was generously overoptimistic on economic growth, certainly when compared to the evidence from their sectors, and made rather too light of the throttling constraints of corruption and creaking infrastructure. On the other hand, with several supposedly more mature EU economies already in hospital or waiting for the ambulance, Russia’s performance looks healthy in comparison. Spanish and Portuguese listeners were especially circumspect, and the Irish unusually quiet.
And we ended with oil. Blessing or curse? The means to help the poor and the old in difficult times, against the risk of inertia in the modernisation drive. The cash for investment, but a distortion of the exchange rate. With the African risk premium pushing prices up $20, now consolidated as a tight supply limit, Russia has increased output to its capacity constraints. There remains a risk of a further $20+ hike if there is another confidence shock. And a sustained price above $120 would trigger a relapse into global recession. On that distinctly equivocal note, our energetic host Caroline Wilson, Minister Counselor for Economic and Trade & Investment at the Embassy, bade us farewell, and immediately returned to the fray to chair the next seminar, on energy efficiency in the economy. A sign of the times, perhaps? An excellent session.