Looking At Growth In Russia & Brazil

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Russian Minister of Finance, Anton Siluanov


According to Brazil’s Finance Minister, “Brazil is now growing.” The Minister notes that although the country has “been through some difficult times… the important message is that this recession is over”.  Indeed, there is data that supports his view, such as December’s industrial production reading which rose 2.27% on the November reading and 0.8% on the December 2015 reading.

Key Data Points Still Down

However, both industrial and manufacturing production are still only back at 2004 levels while retail sales are down -2% on November’s reading and -6% on December 2015. Similarly, industrial employment has fallen 8% year over year, and the unemployment rate has now reached 12.6%. Furthermore, the primary trade deficit for 2016 is now wider than it was for 2015.

The Finance Minister also noted that he is pleased with how inflation has moderated “which would help to bring interest rates down”. However, so far there appears to be no relationship between the decline in inflation over recent months and the BCB’s monetary policy. Inflation has fallen to 5.4% from prior highs of 9% in August mainly due to the fall in food prices, limited increases in regulated prices for some goods and services and low domestic demand. The BCB’s key rate has no impact over any of these elements.

Structural Reforms Underway

The Finance Minister has also referred to “structural reforms” of which there has been one: the implementation of a cap on spending. As of 2017, spending will not be allowed to grow faster than the inflation rate of the prior year. It is important to note that this rule is not overly prohibitive during times of slowing inflation but should inflation start to rise again, this could become the case.

The second reform – pension reform – is yet to be completed. The current pension regime is deemed too generous and essentially unsustainable. The government is now proposing targeting a minimum pensionable age of 65.

Political Reforms Still Needed

Currently, there are no political reforms planned. In fact, the current political consensus has been built up around the preservation of the system as opposed to economic reform. Brazil is likely to remain attractive due to its size, as proven by foreign direct investment which has remained resilient through the crisis, though is not likely to return to high levels of growth unless it can push forward with true political and social reform.


Growth in Russia is a little tricky to analyse. In 2016, the annual growth rate fell by 0.2% which was lower than the expected decline. The improvement is partly aligned to the revision of Russia’s historical data series with the 2015 figure now revised from -3% to -2.8%.

However, this isn’t the only reason; Russia has also benefited from a net rebound in contribution from exports as well as resilient industrial production. Orders also rose in January and indicators of business leader expectation have been relatively buoyant since the turn of the year while the fall in investment has been limited to 1.4% over the year and savings are rising.

Consumption Data Weak

However, what stands out is the poor figures for consumption and retail sales, which are down 5.9% year over year in December, even though everything should be fuelling a boost in consumption, with unemployment down at 5.3%, tempered inflation and a strong upward trend in nominal wages. However, there hasn’t been any upturn in consumption and strong figures seen over last Autumn were most likely linked to the impact of the elections and not to an underlying trend.

Increase In Russian Poverty Rate

Another curious element is the weakness of the rebound in lending which is similar to the subdued consumption landscape. Both these elements combined suggests an increase in the rate of poverty in Russia, which is around 15% currently, pointing to a direct change in consumer behaviour. If this weakness in consumption persists, it is likely to that Russian growth forecasts will need to be revised lower.

Standard and Poor’s have voiced concern about the declining quality of Russian budget balances which are offset by higher borrowing from Russian banks. Indeed, in many regions, the Russian state is actually contributing to these issues as fiscal transfers from regions to the state are occurring simultaneously as the transfer of social spending to these regions appears to be increasing.


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