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E. Ilyukhina Real Economy: Trends and Factors Russias GDP for 1H06 increased by 6.5% in current prices as compared to the similar period of the previous year. The economic growth has been supported by anticipated expansion of the internal demand. The internal market expansion has been determined by positive dynamics of both domestic production and imports. One of the factors contributing to the structural specifics of the economic growth is a sustainable outrunning growth of prices of industrial goods manufacturers vs the consumer price index.

According to the Regulations for Data Development and Submission by Federal Service of State Statistics, the preliminary assessment of the 1H06 GDP was performed together with update of the 1Q06 indicators. The1H06 GDP volume in current prices was RUR 12065,3 bio with a 6.5% increase vs the similar period of the previous year. Accelerated rates of industrial development and works in the construction sector made a domineering impact on the structure of 2006 GDP with sustained development dynamics in trade and services turnover.

Table 1.

GDP growth indices by sectors of economy during the first 6 months of 2004 2005, in % to the respective period of the previous year 2005 By quarters By quarters I II III IV I II GDP 105 105,7 106,6 107,9 105,5 107,Industrial production 102 102,2 103,4 105 103,9 105,production of mineral resources 102,3 101,1 101,1 102,2 101,7 103,processing production 101,9 102,9 104,9 107,5 104,6 107,Electric power, gas and water production and distribution 101,5 100,8 101,4 100,4 106,2 105,Construction 104,6 105,8 111,2 114,6 101,6 112,Wholesale and retail trade 110,2 111,8 112,7 114,3 111 110,Transport and communications 106,7 106,2 104,9 106,9 104 107,Financial activities 106,4 106,4 106,5 106,5 109,1 109,Transactions with real estate, lease and provision of services 105,3 107,1 111 111,4 104,3 108,Government administration and military security; obligatory social security 102,5 103,0 102,8 102,8 106,2 107,Education 100,9 102,7 101,9 102,4 101,5 101,Health Service and social services 100,5 101 101,2 101,4 101,6 Provision of communal, social and personal services 105,7 106,8 107,2 110,6 104 108,Net taxes on products 107 108,1 108,6 107,1 110,3 110,Source: Rosstat The acceleration of the economic growth rates in the current year has been supported by the outrunning expansion of the internal demand. In 1Q06 the internal demand increased by 9.3%, and in 2Q by 10.1%. Likewise in 2005 it was the enhanced investment activity that made a major impact on the structure of GDP distribution. The investment incremental growth in 2Q06 was 11.7% vs 5.9% in 1Q06.

With account of the income growth of the population and companies against a stable decrease in competitiveness of domestic goods and as a result of the strengthened ruble currency, a dynamic shift of the consumers preferences towards imported goods has been observed. According to the Ministry for Economic Development and Trade, 70% of the internal demand in the 1st quarter and 44.8% in the 2nd quarter were met due to higher rates of imports growth. Thus in 1Q06 the imports incremental growth was outrunning the internal demand growth by 2.8 times and in 2Q by 1.6 times. The imports impact essentially differs by sectors of economy and commodity markets. Thus, e.g. on the intermediate goods market the import of some feedstock, completing parts for domestic appliances, and components for car assembly in car-assembly projects makes a positive impact on the restructuring processes and the level of business activity of the domestic producers. At the market of goods of investment machine building the increase of imports is a key factor in the investment projects implementation, upgrading of production facilities and implementation of new technologies. However, one should note more acute competition with the imported goods in such machine building sub-sectors as machine-tool manufacturing, agricultural engineering, manufacture of road building machinery and motor industry.

These industries are characterized by low investment activity, high degree of depreciation of the fixed assets, outdated technologies that lead to lower competitiveness. Active implementation of industrial assembly business and transfer of foreign businesses to Russia remains one of the most promising trends in these industries. In January-July 2006 the share of machinery, equipment and transportation vehicles in the commodity structure of imports increased by 4.3 vs the similar period while their value volume went up by 46.7%. The import of light-duty cars by legal entities increased by 30.9%, and by individuals by 88.3% against 9.3% growth of domestic production.

The situation at the consumer market is defined by individual income growth, new segments of goods and services offers and more stringent requirements of the consumers towards product quality.

The 1H06 consumption rates of the households are retained at the level of 11.0% due to high dynamics of growth of the import volumes. As the ruble currency gets stronger and the consumers preferences are shifted to average price segments determined by the price-quality ratio, the Russian manufacturers fail to compete with aggressive imports. The exception is the companies that after upgrading and rehabilitating their operation facilities, and building a radically new marketing and logistics system moved themselves into new niches after 1998 devaluation. The competitiveness of the domestic manufacturers of food goods has been based on active investment policy and the current quotas provided for certain food imports. As for production of non food staff, the Russian manufacturers, as a rule, have not compensated for the drop in their price competitiveness by upgrading their operaiton facilities, and this, in turn, have slowed down the production rates of consumer goods and led to a permanent crisis in textile, clothing and leather shoes manufacturing.

In spite of the exceptionally favorable situation at the world fuel and natural resources market the impact of the external demand continued to diminish this year. If in 1Q06 the export (physical volume) increased by 7.8% vs the similar period last year, in the second quarter the slow down of the external demand growth to 5.8% was compensated by the acceleration of the domestic production up to 7.8%. In January August 2006 the index of industrial production made 104.3% to the similar period of the previous year. The major input came from processing/manufacturing industries (index of production is 104.3%) and electric power, gas and water generation and distribution (105.4%). The incremental growth of natural resources production was 2.4%. The growth in construction works is 10.1% against January August, and the commissioning of residential space exceeded the previous year indicator by 5.4. This year a trend of accelerating growth rates of paid services and retail goods turnover has continued.

14,12,10,8,6,4,2,0,I II III IV I II III IV I II 2004 2005 GDP Internal demand External demand Fig.1. Changes in the growth rates of internal and external demand in 2004 2006 in % vs the respective quarter of the previous year Due to the increase of the purchasing power of the population retail trade turnover has raised considerably. With the retail turnover increase by 12.1% as compared to January August 2005, the sales of food staffs went up by 9.4% and non-food staffs by 14.5%. Such increase of the retail trade volumes is supported by a dynamically developing sector of consumer credits. Likewise in the last year, it was the advanced development of the nonfood market that pushed up the turnover. To a certain extent this was promoted by structural shifts of the prices in the key commodity sectors. With a 7.1% increase of the consumer prices in January August 2006, the food goods prices jumped up by 7.4% and non-food goods by 3.5%. Such price rise on food goods exceeded the inflation rates due to the shrinkage of offers on a number of foods and a high level of monopoly in the sector of agricultural and food products sales at the regional markets.

As for the nonfood market, the factors curbing price growth were, on the contrary, a high dynamics of offers and a strong competition. However, in August 2006 the price incremental growth almost doubled vs the monthly rates of the price growth in the preceding months of the current year. The price dynamics in the nonfood goods category is considerably affected by the growing purchasing power of the population in relation to high-quality goods and by the expansion of consumer credits scale. Thus, e.g. in the last four months due to a sharp raise of demand the accelerated rates of the price growth on cars were recorded. Besides, the price dynamics on nonfood goods was negatively affected by the gasoline price increase: in August 2006 the gasoline price went up by 5.4% while in the 1H06 the gasoline prices increased by 2.6%.

The price/tariff increase for the paid retail services in January August this year was 11.5% vs 17.4% for the similar last year period, and therefore made a minor impact on inflation; such was the result of the late 2005 actions taken to restrict the tariffs on communal and housing services this year.

In January August 2006 the growth rates of tariffs on the market services slowed down to 9.1% against 10.5% in the similar period of the previous year. However, even with such restricted offer, tariffs on particular services remain pretty high: since the beginning of the year the price of the preschool education services has gone up by 23.7%, the price of the spa and health rehabilitation services by 18%, medical services by 9.3% and personal services by 8.7%.

One of the driving factors of the structural specifics of the 2004 2006 economic development is a sustainable outrunning growth of prices of industrial goods producers against the consumer price index. With account of inflation of 107.1% at the January- August consumer market, the price increase of the consumer goods producers was 13.7%, and the cargo traffic tariffs went up by 13.9%. The prices on consumer goods leaped due to structural factors like: electric power and gas tariff growth exceeding the inflation rates, weak competition at the domestic market of fuels and lubes, negative implications of the local monopolies, and restricted opportunities of the Russian producers to expand their offers in quality goods.

to December 2003.

to December2004.

to December 2005.

Fig. 2. Changes of price indexes of industrial goods manufacturers in August 2004 and in 2006.

The price dynamics varies essentially by producing and manufacturing/processing industries.

facilities products and water Production of metallic ores vehicles products equipment Production of oil products Metallurgical production manufacturers and optical equipment Processing and manufacturing Production, transmission and related mineral resources Woodworking Production of food distribution of electric power, gas Prices of industrial goods Production of mineral resources Production of fuel and energyTextile and clothing manufacturing Pulp and paper manufacturing Chemical industry Manufacturing of non-metal mineral Manufacturing of finished metal Manufacturing of machinery and Production of electric, electronic Manufacturing of transportation Tariffs on cargo traffic Given the 22.2% price increase on the products of producing companies and the 10.1% increase on the generation and distribution of water and gas vs early 2006, the consumer price index amounted to 111.6%. The reserved price policy of the domestic producers of the final demand goods has been formed mainly under the impact of changes in the competition environment and the enhanced import pressure backed up by the ruble strengthening.

It should be noted, however, that during the last two months the dynamic price growth on fuel and power resources and the products has become a driving factor pushing up prices on the final demand goods. The price growth of the industrial goods producers by 3.6% in the period January through August was caused by the price jump on the fuel and power natural resources by 7.5%, including that on crude by 21.1% and natural gas by 22.6%.

In August, after a two-month suspension period, the prices on oil products jumped up considerably by 7.7% while since the year start by 26.1%. At the background of dropping prices on oil products at the world markets, the domestic prices on gasoline grew by 8.9%, diesel fuel by 3.9% and heating oil by 5.1%. Since the beginning of the year the prices on gasoline have increased by 30.6%, and on heating oil by 30.8% which exceeds the growth pace of the world prices.

This year the prices on metals have been growing at very high rates as much as the respective world prices also have been going up. In July August the growth rates on the iron ore products were accelerated by 4.8%, non-ferrous ores by 4.1%, while the prices on the metallic ores production went up by 31.7% since early 2006. This in turn pushed up the prices in processing industries. Thus, since the beginning of this year in ferrous metals industry the prices have gone up by 43.2%, and in copper production by 60.6%. At the ferrous metal market the prices on cast iron and blast furnace ferrous alloys have increased by 26.4%, ferrous alloys (except blast furnace alloys) 8.3%, cast iron and steel pipes by 36.8%.

The price increase on engineering materials has led to accelerated growth of monthly producers prices in the machine-building sector. In January August 2006 the prices in the manufacturing sector of electric, electronic and optical equipment grew by 13.0% vs 4.5% in the similar period of the previous year. The strengthening of the real effective ruble exchange rate and higher rates of cost growth compared to the labor productivity almost fully set off those price benefits the Russian manufacturers enjoyed after 1988 devaluation in the machine and equipment building sector, and transportation vehicles manufacturing.

According to the estimates of IET, the forecasted growth of the producer price index in 2006 will make 14.4%, in natural minerals production 30.4% and in processing/manufacturing industries 15.8%.

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