Bloomberg News

Russian Economy Overheating Risk to Abate, Bank of America Says

June 21, 2012

The Russian economy’s risk of “overheating” from consumer spending is about to ease as slowing global growth pushes down oil prices, the key source of revenue for the world’s largest energy exporter, Bank of America (BAC:US) Merrill Lynch said.

The country’s lowest-ever unemployment rate at 5.4 percent and wage growth of 15.1 percent in May, reported by the statistics office yesterday, prompted the bank to lift its end-2012 inflation forecast to 6.3 percent from 6 percent, Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow, wrote in an e-mailed note today.

Russia’s economy expanded 4.9 percent from a year earlier in the first quarter as consumers take advantage of record-low inflation, a boost in government spending and delays to increases in regulated prices. Even so, cooling global growth and falling oil prices are bound to limit the risks, Bank of America said.

“All of these supportive factors and trends will reverse later in the year,” Osakovskiy wrote. “The economy should start to feel the impact of lower oil prices and a related decline in corporate profits.”

Government spending expanded earlier this year as Vladimir Putin pledged $158 billion more for pensioners, the military and state workers before re-election as president in March.

The jobless rate dropped 0.4 percentage point to 5.4 percent, matching a level reached four years ago and the lowest since at least 1999, the statistics office said.

Corporate investment has also surged this year, rising 7.7 percent in May from the same month last year as the government eased social-security contributions for employers, Osakovskiy wrote.

While inflation will probably breach the central bank’s 6 percent target, the goal of supporting economic growth “will likely outweigh inflationary concerns later in the year,” prompting the central bank to cut its overnight auction-based repurchase rate and benchmark refinancing rate by 50 basis points in the fourth quarter. The rates are at 5.25 percent and 8 percent, respectively.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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