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4.2.1. Is Russian industry recovering from the crisis The estimate of general trends in the Russian industry both in the crisis situation and at the stage of recovery from it does not seem to be an easy task. Low immediacy and insufficient frequency of the official data release became evident at the end of 2008 the beginning of 2009.

In 2011 users of official industrial statistics faced one more problem: the insignificance of monthly changes in output complicates interpretation of this data while possible (or at least expected) second wave of the crisis reinforces demand for anticipatory indicators. In this situation the Business Surveys Department of IEP resumed regular calculation of IEPs Industrial Optimism Index (IEP IOI)1.

In the situation of economic crisis this index helps to tackle several important tasks. First, it provides an opportunity for an actually real-time (as compared with the frequency and immediacy of official statistics) insight into the performance of domestic industry. Second, enterprises participating in the IEP surveys are the middle class of Russian industry. They are located all over the countrys territory and operate basically in processing industries. Authorities and experts not always get timely and sufficient information on the performance of such The index is calculated as the simple average of balances (differences in responses) for four questions from the IEP questionnaire:

1) actual change of demand, balance = % growth % decrease;

2) estimate of demand, balance = % above normal + % normal % below normal;

3) estimate of finished goods stocks, balance = % above normal % below normal;

4) output projections, balance = % growth % decrease.

Balances of responses to the 1st and the 4th questions are adjusted for the seasonal and calendar factors.

The index can range from -100 to +100. A positive value of the index implies the prevalence of positive estimates. A negative value of the index means that negative estimates prevail. Lowering of the index value is the sign of deteriorating situation while its growth the sign of ameliorating situation.

Section The Real Sector of the Economy enterprises. Third, the index is calculated on the basis of indicators having no analogues in the system of state statistics but describing the key features of real situation in the Russian industry (demand, stocks, output projections). The 19-year experience of conducting such surveys (the number of which exceeded 230) and analyzing their results proves that they provide a very precise and comprehensive outline of enterprises performance. Long-standing, personified and non-formal relationships with respondents (90% of which are chief executive officers of enterprises) facilitate gathering of the most objective information on the performance of Russian industry. As a result the IEPs Industrial Optimism Index illustrates the true state of affairs therein.

The post-crisis maximum of the indicator was achieved in October 2010, followed by 4 months of unsuccessful attempts to continue recovery from the recession. But by March 2011 the optimistic spirit in industry faded away. In April the indicator of optimism lost two more points. In May no principal changes took place as compared with April, with the index remaining at the minimum level over the previous 11 months. So, a relatively steady (with few exceptions) overcoming of the late 2008 crisis has evidently come to an end (see Fig. 9).

03/10/06/15 08/05/01/-15 12/06/-12/-1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/Fig. 9. IEPs Industrial Optimism Index, 2005The major contributor to the loss of industrial optimism in 2011 was the demand trend.

From December 2010 the growth rates of sales were down 16 points. An evident growth of demand was replaced by an equally evident decline. The indicators for May were the worst since autumn 2009 (!). In the following months enterprises hoped to reverse this negative trend. At least, those were their projections.

According to opinion of enterprises executives, in June the situation clearly improved.

The basic driver of the Index growth was the dynamics of demand. In June it experienced positive changes that were the most sizable over the previous 24 months. The growth rates of sales (when seasonally adjusted) increased and changed the sign: the decline of demand in May was superseded by the growth of sales in June. The latter pushed up production projections of enterprises. In June they improved by 5 more points and peaked (after seasonal adjustment) to a 3-year maximum. The stocks of finished goods made a very modest positive contribution to the growth of enterprises optimism. The estimate of (satisfaction with) de RUSSIAN ECONOMY IN trends and outlooks mand had no impact on the Index. This indicator demonstrates astonishing stability ranging from 56% to 59%. Most enterprises seem to get accustomed to the situation of sluggish recovery from the crisis and are reluctant to respond to swings of sales.

However, in a month it became clear that the surge of optimism in June was occasional and the spirits in industry returned to their worst patterns in the past 12 months. The sharp drop of the Index (having no analogues in the previous 13 months) was conditioned by the negative dynamics of all its components.

The greatest changes occurred in the level of satisfaction with the sales volumes. Within a month this indicator lost 6 points and plunged down to a 6-month minimum. Such a dramatic revision of demand estimates was due to the evident slow-down of demand growth. When adjusted for the seasonal factor, this indicator demonstrated a complete halting of growth as regards sales of industrial produce in July. The divergence of actual demand trends in July from the June forecasts pushed the estimates of demand even lower. Enterprises anticipated continuing growth of sales in July. The latter circumstance impelled them to revise their estimates of stocks of finished goods downwards. After a long period of stability and proximity to zero, in July this indicator fell down to a 15-month minimum (see Fig. 10).

OUTPUT PROJECTIONS -ESTIMATE OF STOCKS ACTUAL -CHANGE OF DEMAND ESTIMATE OF DEMAND --1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/Fig. 10. Components of Industrial Optimism Index, 2005The discontinued growth of sales and the worse estimates of finished goods stocks had a negative effect on output projections. After a 3-month rebound enterprises decided to notably cut production growth rates in the nearest months. Meantime, forecasts of demand growth remained optimistic, i.e. industry planned (would have liked to) meet the demand by utilizing stocks of finished goods. Indeed, in the following months enterprises anticipated further and more intense decrease of stocks.

In August the situation in Russian industry on the whole did not deteriorate. The positive trends in output projections and satisfaction with sales were leveled off by weaker demand and worsening estimates of finished goods stocks.

Section The Real Sector of the Economy The September estimates of Russian industrys performance showed the lowering of enterprises optimism. On the whole the IEP Index did not demonstrate a pre-crisis (and already expected) drop similar to the one registered 3 years before. As compared with the maximum the decrease was only 5.3 points. But the dynamics of Index components and other indicators, monitored by IEP experts on a monthly basis, then caused concern.

First, the demand for industrial goods was stagnating for the third month in turn. However, till August industry went on hoping for its revitalization. In September these illusions were superseded by a drastic revision of forecasts: within a month the balance of expectations dropped from +13 to -5 points as judged from initial data. The September demand forecasts suggested a very sizable negative adjustment of the actual sales dynamics in the last months of 2011. Second, after a period of relative stability, the satisfaction with demand level instantly fell by 10 points. Industry could no longer bear slack demand. Although in September it preserved the same output growth rates but third, - production projections lost 12 points within a month and 37 points as compared with the years maximum. When adjusted for seasonality, the indicator displayed reduction to a 5-month minimum. Fourth, estimates of finished goods stocks showed their apparent surplus which could be due to both the stagnant demand and the slowing down of unit costs growth. Fifth, in order to revive demand enterprises once again refrained from raising prices. Russian industry does not often resort to price tools: the halting of growth of ex-factory prices and their further reduction was recorded by surveys before the 1998 default, prior to and on the exit from the 2008 crisis.

At first glance, the value of Index calculated in October 2011 did not evidence the strengthening of negative trends in the performance of Russian industry. It improved by points and reached the average level for that year.

But detailed analysis revealed that the Index grew owing to two subjective indicators: the estimate of finished goods stocks and the satisfaction with demand. The first of them instantly improved by 12 points and as a result quite a sizable surplus of stocks typical for the previous months was superseded by their shortage. The latter fact in the situation of apparent weakening of demand and faint hopes for resumption of sales growth rather evidenced that industry cleared its stocks of finished goods and did not plan to replenish them in the near future.

Therefore, the shortage of stocks in the situation of sluggish (or decreasing) demand was rather a sign of the firm conviction in the development under negative scenario than of the industrys inability to satisfy the effective demand.

The satisfaction with sales in October also improved. This indicator instantly grew by points and achieved a post-crisis maximum. It appears that even modest demand seemed normal for most (65%) enterprises in the situation of nervousness on the world markets and uncertainty about even the nearest future. The demand for industrial output continued to decrease. The rate of change (after seasonal adjustment) reached a 20-month minimum, i.e. no such an intensive drop of sales had been observed since February 2010. The output projections plunged to a 14-month minimum.

In November the situation in industry deteriorated as compared with October and returned back to the September level when minimal since June 2010 value of the indicator was recorded.

The principal cause of the November lowering of Index was the intensifying drop of demand for industrial products. As a result, the satisfaction with sales volume fell. One more sequence of the shrinking demand was the worsening balance of estimates of finished goods stocks even despite reduction of their physical volumes. To the opinion of enterprises, revi RUSSIAN ECONOMY IN trends and outlooks talization of industry in these conditions and, moreover, on the eve of nation-wide New Year holidays was unlikely. In November their initial production projections plummeted to the minus area down to the value that had never been registered either in the pre-crisis years or in the current year. However, the adjustment for seasonality flattened this nose-dive up to the level of the previous two months.

The Index for December showed that situation at enterprises continued to deteriorate. The industrial performance indicators by the end of 2011 were apparently worse than in the previous year. In the last months of the year the most sizable changes for the worse were observed in estimates of sales. Despite positive dynamics of demand, this indicator lost 11 points after its October surge. However, the positivity of demand trend was relative. In December the growth rates of sales demonstrated just the slowing down of decline, the intensity of which in the two previous months was record for 2010-2011. The aggravation of the European debt crisis became the turning point for output projections. In September they fell by 9 points and failed to restore till the end of the year. It appeared that managers of enterprises adequately assessed the prospects for Russian industry.

At the beginning of 2012 the Industrial Optimism Index fell to the minimum level recorded in the last 18 months. And even higher optimism of projections failed to make up for the worsening of actual dynamics and its estimates. The situation in Russian industry has evidently deteriorated.

Summing up, one can state that according to IEPs IOI in 2011 the recovery of Russian industry from the crisis has apparently slowed down. The rally registered in June turned out to be incidental and failed to reverse the general trend of the past year when optimism sooner fell than grew. The results of the recent months show that the industry is plunging into the second wave of the crisis rather than finding a way out of it.

Following the aggravation of European problems in autumn and the growing uncertainty on the world markets, the Index of Industrial Projections which is based on three projections of enterprises (demand, output and employment) and in all other respects is similar to the Industrial Optimism Index, demonstrated a sharp decline of enterprises expectations and their stabilization at the level which was minimal since August 2010 (see Fig. 11). The initial plans and projections of enterprises had been decreasing with different intensity since August 2011.

However, in January 2012 surveys recorded a cardinal improvement of projections for all the basic indicators: those of demand, output, employment and investments. As a result the Index of Industrial Projections was up 5 points. Most probably, there are no economic grounds for such a surge in the situation of aggravating crisis of Eurozone and the growing pessimism of experts expectations. But it can have a political explanation. It seems that home politics have intervened in home economy: the national peculiarities of counting votes at the elections to the State Duma, the societys response to them and convulsive attempts of authorities to extinguish discontent with a view to remain in power. Which of the taken away from the society and the economy within the previous 10 years will be given back, who will attend to this and which of the pre-election promises will be materialized these seem to be the factors concerned by Russian enterprises when making projections for recovery from the protracted crisis.

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