The Kommersant, in its assessment of the pace of industrial production, refers to a study by Sergey Tsukhlo, Head of the Business Surveys Department at the Gaidar Institute.
In April 2022, Russia’s GDP, which had been still on the rise in March, began to decline, and most of the major sectors of the economy showed a noticeable decline in their growth rates, while the rate of decline in private demand accelerated noticeably. In May, industry demonstrated a sharp decline in stocks of raw materials and materials; against the backdrop of a supply crisis, this may worsen the performance of processing industries, where the situation so far has been surprisingly stable. However, the rapidly increasing shortage of reserves has caused great concerns. Unemployment remains at a record low, and no major changes in the labor market are expected until Q3 2022.
The summary data released by Rosstat in April made it possible for the RF Ministry of Economic Development to state that this country’s GDP growth (1.3% in March, and 3.5% in Q1) gave way to a decline of 3% in annual terms “against the backdrop of an unprecedented sanctions pressure” caused by Russia’s military operation in Ukraine. The main input in the decline rate was made by the “transport and logistics restrictions” and a reduction in domestic demand; and among the industries, by wholesale trade (-11.9% in April vs -0.3% in March year-on-year) and freight transport (-5.9% vs +3.6%). Although monthly GDP data are usually less filtered and of poorer quality than quarterly data, in this case they indicate expected events: the transition period from GDP growth to GDP decline can primarily be used to assess the depth of the economic shock.
According to Rosstat’s estimates, since January 2020, the seasonally adjusted output growth rates in agriculture have remained virtually unchanged, at their average monthly level for 2019; in the building construction sector in April, the former rose above the latter by 12%. Besides, compared to its average monthly value for the pre-crisis year 2019, output in extractive industries shrank by 6%, although in March it had exceeded the latter by 1%, and in December 2021, by 2%. The movement of the corresponding index in processing industries stabilized at +5% in March, and at 6% in April, as had been demonstrated by accelerated growth rates (see The Kommersant issue for May 20), although its movement pattern had noticeably worsened after late 2021, when the corresponding index stood 10% above its 2019 level.
The forecast values plotted by the Gaidar Institute, similarly to the forecasts released by Rosstat, have shown no noticeable improvements in the current business activity estimates in industry (except for some slowdown in the growth rates of selling prices due to contraction in demand). Finished goods inventories have remained at a low level, and so companies can increase their output on the back of declining demand. Meanwhile, in May, the Gaidar Institute noted a sharp deterioration in the estimated stocks of raw materials associated with a supply crisis (see the chart).
According to the Gaidar Institute’s estimates, the shortage of components and materials has become more pronounced than that caused by the coronavirus pandemic, thus hitting its historic low since 2009. So, the study’s author Sergey Tsukhlo concludes as follows: “Over June-July, industry will most likely not be able to overcome the shortage of stocks of components and raw materials.”
Note that the relatively good performance indicators in processing industries coupled with the very rapid drawdown of reserves are more likely to point to a slow, rather than rapid, adjustment – ​​in fact, this means that the crisis is perceived either as a temporary phenomenon (“supplies will recover later on”) or an unresolvable problem (“we are going to work while the materials last”): in the April statistics, there are no signs of any reorientation of imports of intermediate goods, or of any structural adjustment altogether; and the same is true for May.
It is possible that, at the present moment, it is simply too early to expect such data; however, the rate of destocking appears to be very high, and by mid-summer it will probably be impossible to do without stopping some production facilities, even if new suppliers could be found: supply chains cannot be built within just a month or two.