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In the first 5 months of 2003, the increase in output of the base economic sectors made 7.2 per cent in comparison with 3.7 per cent registered in the respective period of the preceding year. The high level of business activity was observed across practically all sectors of the economy. As compared with January through May of 2002, the amount of industrial output grew by 6.7 per cent, the amount of completed construction works by 14.3 per cent, the retail trade turnover increased by 8.9 per cent, while the freight turnover grew by 7.0 per cent. The growth in production resulted from the stimulating influence of external and domestic demand.

The growth in real household incomes and the changes in the structure of their utilization are additional characteristics of economic recovery. In January through May of 2003, the real disposable cash household incomes increased by 14.3 per cent, real wages and salaries by 9.4 per cent as compared with the figures registered in the respective period of the preceding year. The lower rates of growth in retail trade turnover as compared with the rates of increase in real household incomes characteristic of this year are determined by the intensifying propensity of the population for saving. The share of expenditures for purchase of goods in the total amount of household incomes decreased by 4.1 percentage points in comparison with the figures registered in January through April of 2002, while the share of savings in the form of bank deposits and securities increased by 1.2 percentage points and purchase of foreign exchange grew by 2.4 percentage points. Taking into account the formed trends, in 2003 the real disposable cash household incomes will make about 109 to 110 per cent of the level registered in 2002.

Accelerating rates of economic development in the end of 2002 and early 2003 were positively affected by the favorable situation on the world market of energy resources. The increase in the amounts of exports made 130.1 per cent as compared with the figures registered in the respective period of the preceding year.

Although there was observed simultaneous growth both in volumes and amounts of exports, the influence of the price factor was decisive. At the background of a certain decrease in the average world oil prices in April and May of 2003, there is observed a contraction of amounts of export of goods in the Russias economy. At the same time, the indicator of import of goods also demonstrated a trend towards certain deceleration of the rates of growth over the last few months, although on the whole over the period since the beginning of 2003, imports grew by 20.1 per cent in comparison with the figures registered in the respective period of the For the statistical evaluations of the relationships between the dynamics of the real Ruble exchange rates and payment arrears see IET studies referred to above. According to the basic hypothesis, the growth in real exchange rate results in decline in the profitability of domestic production, what facilitates a growth in payment arrears determined by ineffective production.

For details concerning the multiplicative effects of spreading of indebtedness see: Lugovoy O. "Arrears in a Transition Economy: the Mechanism of Contagion", RECEP, Russian Economic Trends 2002-Q2 pp. 19-30.

preceding year. The monthly balance of trade made about US $ 5 billion in January through May, what was significantly above the level observed in 2002 and is comparable with the indicators registered in 2000.

Due to the favorable external economic situation, the financial standing of enterprises belonging to the real sector of the economy improved. In January though April of 2003, the balanced financial results increased by 82.1 per cent in comparison with the figures registered in the respective period of 2002, including industry by 72.1 per cent, or Rub. 80.2 billion. The growth in the balanced profits in industry was completely determined by the increase in the results of financial activities of export oriented industries: fuel industry, ferrous and non-ferrous metallurgy, and the chemical and forestry complex.

The growing proceeds of exporters favorably affected the character of development of other sectors of the economy and permitted to overcome the trend towards a deceleration of investment activity formed in and 2001. The growth in investment in fixed assets made 11.8 per cent in January through May of 2003 as compared with 2.3 per cent registered in the respective period of 2002.

The accelerating rates of growth in investment in fixed assets may be explained by short term factors. As risks lowered as a result of the consistent improvement of the normative and legislative base and more predictable policies pursued by the authorities, these developments determined the changes in the motivation of activities of potential investors. An analysis of dynamics of investment demonstrates that as economic growth recovered, private Russian and foreign investors broaden their presence on the Russias market.

Basing on the results of the 1st quarter of 2003, foreign investment in Russia increased by 65.4 per cent as compared with the figures registered in the respective period of the preceding year. Besides, since 2002 there was observed a sharp decline in the outflow of private capitals from Russia. In April and May of 2003, the inflow of capitals from abroad exceeded the export of capital and private investment in foreign assets.

However, in spite of certain acceleration of the rates of investment demand, there remains a significant idle potential: the gap between the gross saving and accumulation makes about 10 per cent of GDP.

Figure 1. Changes in output dynamics across the base industries in 2001 through 2003, in % of January through May of the preceding year.

--2001 2002 The outpacing growth in external and investment demand in comparison with the dynamics of other components of GDP utilization determined the specifics of structural shifts in the economy. As concerns industry, there the acceleration of the rates of increase in output was accompanied by the growing impact of oil extracting industry and metallurgy. As compared with the figures registered in January through May of 2003, the increase in output of fuel industry made 10.1 per cent, of ferrous metallurgy 9.4 per cent, nonferrous metallurgy 7.1 per cent. This year, the intensive increase in production in the export oriented sector retains its dominating influence on the dynamics of economic growth.

Industry Forestry Chemistry Fuel industry Food industry Light industry Ferrous metallurgy Power engineering Natural gas industry Oil extracting industry Construction materials Oil processing industry Mechanical engineering Non-ferrous metallurgy As concerns the final demand sectors, the changes in proportions is accompanied by the growing share of investment sectors. The consequences of the cars overproduction crisis were compensated by an increase in production and export of defense products, recovery of business activity in metallurgy and railroad mechanical engineering, and production of equipment for the industries belonging to the consumer complex.

In January through May of 2003, the amount of production in mechanical engineering increased by 7.5 per cent, while the aggregate output of final demand goods changed by 5.7 per cent.

The deceleration of the rates of growth in output of food industry to 104.1 per cent observed in January through May of 2003 as compared with 108.1 per cent registered in the respective period of 2002 negatively affected the character of production of final demand goods and output of light industry.

Deceleration of the rates of growth in output of consumer goods occurs at the background of increasing effective household demand. In January through May of 2003, the turnover of retail trade made 108.9 per cent as compared with the figures registered in the respective period of the preceding year. In contradistinction to the preceding year, practically all increase in turnover resulted from growing sales of non-food goods. As compared with the figures observed in January through May of 2002, the increase in sales of non-food products made 10.6 per cent, while sales of food goods increased by 7.0 per cent. The widening gap between the rates of growth in domestic production and increasing household demand was bridged at the expense of a higher share of imported goods in commodity resources of retail trade turnover.

In the 4th quarter of 2002 and in the 1st quarter of 2003, imported goods made over 50 per cent of the total commodity resources of retail trade, as compared with 41 per cent registered in the 1st quarter of 2002. The decrease in the share of domestic products in retail trade turnover demonstrates that in the post-crisis period the processes of restructuring and diversification of industries belonging to the consumer complex, especially light industry, did not correspond to the dynamic changes in the indicators characterizing living standards and effective household demand. In this situation, the expansion of consumer imports rather compensates low business activities of domestic businesses in this sector of the economy than is a factor braking the development of the domestic production.

This year, the Russias economy is characterized by exceptionally high macroeconomic indicators.

Investment growth became a major factor facilitating economic recovery. At the same time, business activity is supported by increasing crediting of the real sector on the part of the banking system and foreign investors.

This development fully corresponds to the evaluations of the international ranking agency Fitch, which in May increased long term rankng of Russias liabilities to BB+ from BB-. The forecast of the long term ranking, which remained positive over 12 months, is now changed to stable, what provides grounds for positive evaluations of economic growth till the end of the year.

O. Izryadnova IET Business Survey: Industry The official data provided by the state statistics confirmed the conclusions concerning the dynamics of base indicators of the Russias industry obtained basing on the business surveys conducted by IET. In the second half of June, the RF Goskomstat admitted that in May the growth of production in domestic industry practically stopped. The index of industrial output made 99.6 per cent as compared with the figures registered in April (102.1 per cent as adjusted for exclusion of the labor time fund).

According to the evaluations of the Center for Macroeconomic Analysis and Short Term Prognostication (CMASTP), in the 1st quarter of 2003 the major contribution to the increase in industrial output was made by fuel industry (20 per cent), ferrous and non-ferrous metallurgy (24 per cent), mechanical engineering (36 per cent). The share of other industries made less than one fourth of the increase in the total industrial output. In April and May three industries fuel (22 per cent), food (29 per cent), and construction materials (12 per cent) accounted for almost two thirds of growth in the total industrial output. Mechanical engineering (where on the whole there was registered a decline in output basing on the results of two months) and metallurgy were excluded from the list of leaders.

However, according to IET surveys the first June results provide evidence that there begin to appear obvious signs of recovery in the Russias industry. First, the rates of growth in cash sales started to recover.

The balance of changes in effective demand became positive and significantly different from zero. The absolute values of this indicator in the industry at large are formed primarily at the expense of growth in demand in the industry of construction materials, mechanical engineering, chemistry, petrochemistry, and food industry. At the same time, in other industries of the manufacturing sector the amounts of sales either continue to decline or remain at the previous levels.

% : -: --: --7/98 1/99 7/99 1/00 7/00 1/01 7/01 1/02 7/02 1/03 7/CHANGES IN EFFECTIVE DEMAND AND PROFITS DEMAND: EXPECTED DEMAND: REPORTED PROFITS: REPORTED However, even this change in the dynamics of sales proved to be enough to improve evaluations of amounts of sales according to the scale above the norm below the norm. The balance of evaluations increased up to 50 per cent, what is the best value for the last nine years (see Fig.). The June survey registered a growth in the share of evaluations normal up to 46 per cent. It is also the maximal value observed since 1993. At the same time, the balances of evaluations of amounts of non-cash types of demand have remained negative since the beginning of 2002, what bears testimony to the enterprises readiness to increase amounts of such transactions.

% (=% -% ) - - --1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/BALANCE OF DEMAND EVALUATIONS BALANCE = % ABOVE NORM - % BELOW NORM) BARTER PROMISSORY NOTES AND OFFSETS EXPORT EFFECTIVE Second, production has immediately reacted to the growth in sales. In June, the rates of output at once increased by 23 balance points and exceeded the indicators observed in April and May. In 203, only in March surveys registered higher rates of growth. In June, production increased across all industries with the exception of power engineering and the forestry complex. The highest values of the indicators were registered in the industry of construction materials, food industry, and mechanical engineering.

Third, the rates of decline in real profits of enterprises have significantly decelerated. In June, the balance increased by 9 points; however, on the whole this indicator retained negative values across industries according to enterprises assessments, this financial indicator continued to fall. Some growth in profits was registered only in construction industry, mechanical engineering, chemistry, and petrochemistry.

Fourth, the evaluations of finished stocks did not change in June in spite of the outpacing rates of gwoth in output as compared with the increase in demand. This is an evidence that enterprises expect that sales will continue to grow in the next few months and do not plan significant changes in the rates of growth in output.

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