ENCOURAGING ECONOMIC NEWS FROM RUSSIA.

No repeat of the Russian economic miracle of 2000 can be expected this year, but policymakers can take some comfort in recent statistics indicating that 2001 will not be an economic washout. While Russia’s economic performance in 2001 is well behind the breakneck pace set last year, preliminary statistics for the first six months of the year provide evidence that growth in 2001 will exceed expectations formed earlier this year. The growth this year is driven mainly by domestic demand. In particular, gains in real wages are pushing up household buying power. Although figures for GDP growth in the second quarter have not yet been released, gross activity indicators for the period are encouraging. According to Goskomstat, the index of output of goods and services, based on measures of the physical volume of output of industry, agriculture, construction, transport and retail trade, rose 5.7 percent year-on-year in the second quarter and 5.3 percent for the first half. The increase in this index for the first quarter of 2001 was 4.9 percent, the same as the figure for GDP growth eventually reported for that quarter.

The pacesetter among the sectors of the Russian economy is retail sales. Strong domestic demand, particularly household consumption, is driving aggregate output growth as the pace of exports has slackened. Hikes in real net average wages resulting in growth of 18.3 percent year-on-year in the first half of 2001 contributed to rising real disposable incomes and household consumption. Real disposable income per worker in January-June 2001 was up only 4.4 percent year-on-year. Because pensions have also increased significantly in real terms, by 22.5 percent in May 2001 over May 2000, the lagging contributions to growth in real disposable money incomes would appear to be entrepreneurial income and income from personal agricultural plots. It is highly unlikely, however, that these components are falling so far behind in real terms. It is more likely that income from these sources is significantly underreported. It is instructive to note that while average monthly wages are currently reported to be about 17 percent higher in real terms relative to December 1998, reported disposable money income was only about 93 percent of the December 1998 level in real terms.

Gross investment in fixed capital, another major component of domestic demand, has been growing at a markedly reduced pace this year. Expenditures were up only 4.2 percent in real terms in the first half of 2001 compared with an increase of 17.4 percent recorded for the full year 2000. This can be explained in part by the high statistical base of comparison. Another factor is the impact of fiscal restraint on public investment since the share of federal expenditures in GDP is targeted at the same 13.5 percent as in 2000, despite anticipated increases in foreign debt service requirements and slower growth in GDP this year. Nonetheless, the pace of growth in gross fixed investment may well be accelerating. Month-on-month real increases in gross investment in fixed capital in May and June, reaching 16.0 percent and 21.0 percent, respectively, exceeded the increased activity expected in these months in seasonally unadjusted figures (Goskomstat, July 2001; see also the Monitor, August 3).

RUSSIAN CONSUMER PRICE DEVELOPMENTS IN JULY CONFIRM A POSITIVE TREND.