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In recent years the positive factor of the steady economic growth was the simultaneous expansion of both the foreign and home markets. Whereas the dynamics of external demand was formed under the influence of exceptionally favorable situation in the world markets of fuel and raw material resources, the expansion of the home market was defined by cumulative effects of increase in domestic business activity and systematic growth in the effective demand of population in the environment of steady growth of economy and population revenue.

I II III IY I II III IY I II III 2004 2005 GDP Internal demand External demand (export) Figure 1 Changes in the growth rates of internal and external demand in 2004 2006 in % vs. the respective quarter of the previous year External and internal demand ratio during 2004-2006 was subjected to quite considerable transformations.

In 2005- 2006 the slowing down in external demand growth rates proceeded in a more acute form and was provoked by the stagnant dynamics of oil and oil products export volumes. The increase in external demand in 2005-2006 was in average 6.3% compared to 12.1% in 2003-2004.

The joint impact of internal factors, which determine the level of business activity, was quite enough to make up for weakening influence of external demand on the economic growth rates. In 2006 the increase in internal demand, according to preliminary estimation, reached 10.5% against 9.2% in 2005 and 7.8% in 2003. The contribution of the internal demand into the increase of GDP was nearly 75% and exceeded sig nificantly the figures of the most successful year of 2000. The positive dynamics of the internal demand was defined both by the growth of domestic production volume and increase in import supply. The sustention of the high level of home market effective demand called forth the acceleration of import supply rates. The increase in import supply volume in January-October 2006 was 28.4% and exceeded the figures of the previous year by nearly 6 percentage points.

40,35,30,25,20,15,10,5,0,2003 2004 2005 2006* 2003 2004 2005 2006* -5,worth volume growth rates volume growth rates export import *) January-October Figure 2 Changes in import and export growth rates in 2003-2006, in % vs. previous year Against the background of reserved growth in domestic production in 2005-2006 the change in structure of internal demand resource formation and the differentiation reinforcement among goods market is observed. The prominent impact on import supply structure in 2006 was made by the intensive growth in the import volume of capital goods compared to reserved import growth rates of the intermediate goods. The share of machinery and equipment import in the total import volume in January-October 2006 increased up to 47.1% compared to 44.4% in 2005 and 41.6% in 2004. In the structure of the retail trade turnover in the further increase of import consumer goods share was also observed. Due to the tendency for slowing down of growth rates of consumer complex industries, which was initiated by the permanent crisis of textile, clothing and shoe industries, the share of domestic goods in retail trade of non-food market as a result of January-September 2006 decreased to 46.8% against 48.8% in 2005. The dynamics of food import supplies were suppressed by relatively strong competitive positions of Russian producers; therefore the import share in the goods volume of food was stabilized at the level of 34%. As a result the total competitive positions of Russian producers, considering on one hand the positive influence of increase in production, and on the other hand the negative effect of currency strengthening and the change in the ratio between the internal prices and import, almost returned to pre-crisis level of 1997.

In the environment of ruble strengthening the manufacturers of the goods of final demand follow the reserved price policy. The inflation at consumer market during January-November 2006 being at the level of 108,2% the increase in producer prices of manufactured goods was 9.3%. The price dynamics is substantially different between extractive and manufacturing industries. With the increase in price indices of manufactured goods producers by 12.7% compared to December 2005, in production and distribution of water and gas - by 10.3% and rates of goods transportations by 32.1% the extractive production prices decreased by 1.4%.

Table Price indices by sectors of economy in 1999 2005, December in % to December of the previous year 2006* 2001 2002 2003 2004 Industrial production 108,3 117,7 112,5 128,8 113,4 109,98,Production of mineral resources 104 125,8 101,8 164,7 131,112,Processing production 106,3 113,2 115,8 121,5 108,Electricity power, gas and water 110,production and distribution 127,4 126 114,5 112,5 112,132,Goods transportation reates 138,6 118,3 123,5 109,3 116,*)January-November Source: Rosstat As the ruble currency is getting stronger and the consumers preferences are shifted to average price segments determined by the price-quality ratio, the Russian manufacturers fail to compete with import supplies.

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 ruble devaluation. However the created potential is not sufficient for the sustention of the steady trend of production, labour productivity and efficiency growth. The slowing-down of the production of food growth rates compared with the dynamics of retail trade turnover was also observed. In non-food production Russian producers, as a rule, didnt make up for the decrease in price competitiveness by production modernization, which eventually led to the slow-down in consumer goods production rates and permanent crisis in textile, clothing, tanning and footwear production. Textile and clothing production belongs to the group of manufacturing activities, characterized by critical figures for accumulated depreciation. Mortality coefficient in these manufacturing activities because of decay and deterioration by 4 times exceeds the figure of capital renewals.

An important instrument for modernization acceleration and extension of textile, clothing tanning and connected with it production was the abolition of custom duties for imported technological equipment. In October 2005 the Government of Russia granted domestic light industry companies right for duty-free import of 45 kinds of equipment. According to the Ministry of Industry and Energy data, this measure enabled light industry business to purchase 160.9 thousands pieces of modern equipment and save RUR 122 million.

In 2006 (January-September) RUR 2.1 billion was invested in textile and clothing production (122.3% vs the level of the previous year), and RUR 0.8 billion (230.0%) in tanning and footwear production. The positive influence of modernization was also sustained by the changes in regulations for duty-free import for individuals and by customs control reinforcement. As a result in January-November 2006 first time since 2002- the positive dynamics of textile and clothing production (107,5%), tanning, leather goods and footwear production (113,7%) was observed.

The acceleration of production rates of household appliances and furnishings belongs to the conditions, weakening the negative impact of textile, clothing production and footwear on the formation of non-food market resources, which were produced domestically. The dynamics of furniture production and construction materials (107,8%) corresponds with the intensive growth of house-building and high level of business activity at the housing market. Application of new technologies and the scale extension in assembling production on the basis of imported components.

The dynamics of capital goods in 2006 is of damped character. The increase in domestic production of capital goods during January-November 2006 was 3.5%. In 2006 for the first time in the last 4 years the production of electro-, electronic and optical equipment demonstrates the negative dynamics: 96.4% vs January-November 2005, after the increase of production by 20.7% in 2005. Since 2005 the slow-down in the production of machinery and equipment is observed. The dynamics of machinery and equipment production was chiefly maintained by the demand growth for materials handling, railway, energy and agricultural engineering industry production. In January-November 2006, however, the output of mechanical equipment was reduced by 13.8 % because of the dramatic contractions in orders for production of steam and water turbines, which was the reason of production rates slow-down to 101.6%.

At the capital machine-building goods market the gradual rising of import supplies is one of the key factors of investment projects implementation, production modernization and application of new technologies.

It should be however noted that the competition with import in such fields as machine-tool construction, agricultural machine-building, road-building equipment production and motor car construction has become more acute. Characteristic for this production was still the low investment activity, high level of accumulated depreciation, outdated technologies, which provoke the decrease in competitiveness. Thereupon one of the promising directions for domestic machinery-building development is active introduction of industrial assemblage technology and the transfer of foreign companies activity to Russia.

2005 -Figure The change in the dynamics of processing production 2005-2006, in % vs January-November of the previous year The analysis of the distinctive features of the capital goods market formation is of essential importance, because the anticipating growth of investments in the fixed capital compared to the dynamics of the final consumption had the prevailing influence on the GDP structural shifts in recent years. With regard to growth rates the machinery-building in the last two years remains severely behind of the investment in fixed capital investments, - the fact that increases the disproportions of domestic capital goods production and demand, which is formed under the influence of the change in reproduction and technological structures of investment in production and the maintenance of high level of business activity in Russian economy.

. I. Izryadnova Business Survey in December Russian industry is completing the year of 2006 with the best results as compared to all previous years.

Rather high and sustainable growth of demand allowed the majority of enterprises to reach sufficient volume of sales. Moreover, favorable credit conditions and high production rates make for an optimistic start of 2007.

According to the Russian Statistic Service, a tendency to industrial output growth was continued in November. Average daily production rate has grown in November by 0.6 per cent (seasonal impact was overcome). On average, within two months of the fourth quarter the output growth made 0.6 per month, as compared with an average level of 0.5 per cent per month in the third quarter. The rate of industrial output is estimated by: Rosstat in 104.1-104.2 per cent, by the Center for Macroeconomic Analysis and Shirt-Term Forecasts (MASTF) in 105.1-105.2 per cent (January-November 2006 versus January-November 2005 : as per Rosstat in 104.1 per cent, as per MASTF- in 105.1 per cent).

In December the growth rates of industrial output (upon seasonal impact was overcome) remained at the same level: the demand in the second half-month of 2006 continued to grow quite intensively and persistently. The best results (in terms of growth rates) were obtained in May-June of the current year. Reference figures for December (including seasonal factors impact) confirm that conclusion: unlike previous postdefault years the industries demonstrated an expressed decline (as a rule, up to absolute decrease) of the rates of demand growth, in 2066 the enterprises have demonstrated only a certain decrease in sales growth. As a result, December indicators became the best within the recent years. In general, the dynamics of purchase demand in 2006 was extremely favorable for the Russian economy. The demand for domestic products was growing permanently and intensively practically in all industries.

Nevertheless, with due regard to the assessments in terms of higher-lower standard rate the enterprises were expecting better results at the end of the year. Their satisfaction with the demand has decreased in De Textile and clothing production Production of transport vehicles and equipment Production of oil products Metallurgical production Woodworking Production of rubber goods and plastics Processing production Production of food Pulp and paper manufacturing Chemical industry Production of non-metallic mineral products Production of machinery and equipment Production of electro, electronic and optical equipment Tanning industry, leather goods and footwear production cember up to 63 per cent (versus 65 per cent in November), whereas the dissatisfaction with demand has grown to 35 per cent (versus 30 per cent in November). However, such an adjustment of the demand assessment was not destructive for the results of the last year: in 2006 the number of enterprises, satisfied with the demand for their products, has reached the highest level. In other words, the industry comes back to normal situation in many ways.

The growth rate of industrial output in December did not change greatly in comparison with November.

According to the indicator, taken before adjustment for the seasonal factors, the decrease made only 2 p.p.;

the adjustment for seasonal factors demonstrated the same level of the industrial output growth rates (the highest within the first half-year). Adjustment for a compulsory factor has demonstrated a growth of the rates of industrial output. In comparison with the relevant months of the five preceding years, the results of December 2006 look extremely favorable.

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