Alexey Vedev on current Russia’s economy

The expert noted that it is premature to discuss the overheating economy: «There is such a concept as potential output. That is, the output that economy can provide at 80% capacity utilization and 6% unemployment. This is considered normal. According to all Central Bank surveys, our capacity utilization is about 78–82%. It is unclear what kind of overheating they mean.»

Alexey Vedev also emphasized that it is essential to enhance labor productivity. «This will help to solve labor shortages, because currently there is a lot of evidence that labor force is used extensively and that is why it is lacking. Of course, there is a shortage of labor force and it is linked to wage growth. This is what we are witnessing. This means costs. High costs will inevitably cause a decline in financial results, corporate profits and investments," the expert said

Alexey Vedev noted that wage races should not be expected to continue, even because those industries that were experiencing shortages have already got manpower to work in 2–3 shifts. It makes no sense to attract additional labor force.

The expert also spoke about risks of stagflation: «Economic growth over the past two years has been very healthy, i.e. investments have been growing at about 10% per year. This is good. But now there are fears that this year we will return to stagnation again.

Why do I say that there are fears. Indeed, last year the key rate was raised from 16% to 21%, and GDP growth was 4%. Thus, it cannot be formally concluded that raising interest rates in the economy, increasing loan costs will halt economic growth. Although intuitively it is clear that, most likely, this will happen.»

Alexey Vedev highlighted consumer demand as a driver of inflation. «If we refer to the Central Bank’s policy, foods are the main driver of inflation. People do not buy groceries using loans. That is, the carrot has nothing to do with the key rate. Actually, now the entire economy has become a hostage of this high interest rate. It should not be raised, as it makes no sense, and it is quite dangerous to lower it, as it may ignite inflationary and devaluation expectations. We have to wait for a while.»

Image by Donat Sorokin / TASS