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E. Ilukhina Real Economy Sector: Trends and Factors The index of the industrial production over January-February 2007 was equal to 108.7% to the corresponding figure of the previous year, agriculture production 101.2%, the amount of work in construction 125.4%. The acceleration of the domestic market development was accompanied with the change in proportions of investment and consumer demand. The increase in the investments in fixed assets was equal to 21.7% against 2.7% in January-February 2006, retail trade turnover having increased, respectively, by 13.4% against 10.4%.

High consumer demand growth rates were supported by the increase in real disposable incomes of the population by 12.7% and real wages by 17.5% as compared with January-February 2006.

Macroeconomic situation at the beginning of the current year was formed under the influence of the trends, developed in 2006. Under the extremely favorable situation at the world markets of minerals resources and raw materials it was a dynamic growth of the domestic demand that had the prevailing impact on the structure of the economic growth. The index of the industrial production over January-February was equal to 108.7% to the corresponding figure of the previous year, agriculture production 101.2%, the amount of work in construction 125.4%.

The acceleration of the domestic market development was accompanied with the change in proportions of investment and consumer demand. Since the second half-year of 2006 the construction took the leading positions in the structure of the economic growth, pressing the dynamically developing trade. The increase in the investments in fixed assets was equal to 21.7% against 2.7% in January-February 2006, retail trade turnover having increased, respectively, by 13.4% against 10.4%.

At the beginning of 2007 the market of the paid services to the population is developing at higher rates than last year. Anticipating growth rates are sustained in rather sensitive to the changes in population incomes kinds of services. Still more than 50% of the total amount of population expenditures for services is spent on the services of compulsory nature, not elastic towasrds popultion incomes (housing and communal services, some kinds of passenger transportation and public services). The increase in the amount of the paid services for the population in January-Februsary of the current year was equal to 9.7% against 7.5%, public services 9.6 and 3.2%, medical services 11.6 and 8.5%. It is such kinds of services as technical services and transport vehicles, machinery and equipment repair services and construction and redocoration of hous ing and other buildings that are developing most dinamically and whose share in the amount in the public services comprises more than 50% that develop most.

High consumer demand rates were sustained by the real disposable populations income growth, real wages growth being anticipating, as well as by the sustension of of high bank activity at the market of consumer crediting. The increase in real disposable incomes was equal to 12.7% as compared January-February 2006, in real wages - 17.5%. The growth rates of these indices in January-February 2007 exceeded their level in the corresponding period of the preceding year by 5.7 p.p. and 7.1 p.p., respectively.

In 2006 the increase in consumer prices for the first time over the several years did not exceed the planned figure of 9%. In January-February 2007 the inflation was equal to 2.8%, whereas in the corresponding period of 2006 this index was at the level of 4.1%. As a result of the first quarter the anticipating growth of prices will be 3.5% against 5.0% in 2006.

25,23,15,15,14,14,13,12,12,12,12,11,10,9,8,6,4,4,3,6 3,3,3 1,I II III IV I II III IV Jan-Feb 2005. 2006 Industrial production Workload in construction Retail trade turnover Figure 1. The Changes of Production Rates by kinds of Activities in 2005-2007 as percentage to the corresponding period of the previous year.

Structural shifts in the industry proceeded against the background of anticipating growth of the manufacturing industries as compared with extraction industries, which is characteristic for the growth of Russian economy over the last three years. Though the ratio of growth rates of kinds of economic activities suffered quite considerable fluctuations, on the whole it demonstrates a gradual shift from the growth, based on the exploitation of traditional factors of natural resources potential, which is orientated predominantly to the external market, to the formation of the internal market development resources. The beginning of 2007 was characterized by the acceleration of the dynamics of extraction and manufacturing industries against the background of reduction in production and distribution of electricity, gas and water due to an exceptionally warm winter. In January-February 2007 the increase of manufacturing industries was 15.7%. In extraction industries rates acceleration by 3.4 p.p. as compared with January-February 2006 was caused by the increase in oil production by 4.4% against 1.6%. Electricity production over January-February 2007 was equal to 97.9% of the previous years figure, including heat power plants 94.6% and hydro power plants 118.4%.

-6,15,Jan-Feb 4,8,1,IV 2,33 3,44,III 2,93,4,II 6,2,I 1,0,7,IV 1,4,III 0,4,5,II 0,3,1,4,I 2,3,% -10 -5 0 5 10 15 Industrial production indices Minerals extraction Manufacturing industries Electricity, gas and water production Figure 2. Changes in Industrial Production Growth Rates by kinds of Production in 2005-2007, as percentage to the previous year In the environment of the investments demand growth the positions of the machine-building in the structure of the Russian economy do not seem favorable enough from the point of view of the short-term forecast.

Analyzing the trends of machine-building development, it is the anticipating machines and equipment import growth rates as compared with the dynamics of the domestic machine-building that is notable. Though in January-February 2007 the acceleration by 14.8% in machinery and equipment production was observed this is mainly due to the low base of the previous year, when in this kind of activity a drop of 25.6% was fixed.

Output of machinery and equipment in January-February 2007 increased by 16.0% against 9.0% in the corresponding period of the previous year. The output of passenger cars in January-February 2007 increased by 18.6% against 3.7%. The competitiveness of domestic motor engineering being low, the growth of the demand for foreign brands of cars both imported and produced in the territory of Russia was observed.

In production of consumer goods the positive trends of development sustain. The analysis of industry development demonstrates that serious quality changes in technology and the structure of consumer goods production lacking existing level of the industry development will not let sustain high growth rates for a long time. An important tool for the production expansion in 2006 was the abolition of customs duties for import technological equipment. In October 2005 the Government granted domestic companies of light industry the right of duty-free import of 45 kinds of equipment for 9 months. According to the data of the Ministry of Industry and Energy of Russia this enabled enterprises to purchase 160.9 thou. units of modern equipment and save RUR 122 mln. In 2006 RUR 3.0 bln. was invested in textile and clothing industry, RUR 1.0 bln in tanning and footwear industry. Positive influence of modernization process was supported by the change in the regulations of duty-free import by individuals and reinforcement of the control for customs institution.

As a result of 2006 the textile and clothing production demonstrated positive dynamics (107.3%), as well as leather, leather goods and footwear production (116.7%). However as production output in these kinds of activities comprise approximately 2023% of the level of pre-reform 1991, this did not have considerable impact on the domestic demand. The share of the domestic goods in the retail trade resources of the nonfood market in 2006 decreased down to 44.3% against 45.7% in 2005 and 51.6% in 2000. On one hand, the discrepancy of material and technological basis and labor qualification with the market criteria determined the decrease in domestic non-food goods competitiveness as compared with import, on the other under the existing exchange rates it led to the expansion of niches for import goods. Russian producers of light industry hold one of the least attractive for foreign investors position. By the beginning of 2007 the accumulated amount of the foreign investments into the industry was equal to USD 155 mln. as compared with USD mln. in food industry.

The competitiveness of the domestic foodstuffs producers was supported by active investment policy and existing mechanism for import quotas for some kinds of goods. However this created potential was not sufficient for the sustention of the steady production growth rates, labor efficiency and productivity. The slow down in the food production as compared with the dynamics of the retailed trade turnover was observed in 2003-2004. In 20052006 as a result of investment support strengthening the foodstuffs productions growth rates acceleration was also observed. The growth index in 2006 was equal to 105.4% against 104.3% in and the minimum over the last 8 years level of 2.9% in 2004. In January-February 2007 the increase in foodstuffs production was equal to 17.4% against 0.5% in the corresponding period of the previous year.

The dynamics of the intermediate demand goods production has been in the area of the positive values since 2002. The nature of metallurgical, chemistry and woodworking industry functioning was determined by the level of internal and external demand.

Chemistry complex is the basic segment of the Russian economy. Its proportion in the industry structure by the amount of goods produced comprises about 5.5%, the enterprises secured about 5.4% of the All-Russian currency earnings. Over 2000-2006 the chemicals production output increased by 1.45 times. In January-February 2007 the increase in chemistry production was equal to 13.1% against the decrease of 0.7% in the corresponding period of the previous year, while the production of rubber and plastic goods increased by 25.2% against 11.7%. The capacity of the domestic market for chemistry production being quite high, key factors that limit the functioning of chemistry complex are: high extent of the equipment wear and tear, technological backwardness; the anticipating growth rates of prices and tariffs for natural monopolies production; problems with industrys enterprises provision with the main kinds of raw materials; and scantiness of investment resources;

O. Izryadnova Business Survey in March First estimations of the dynamics of the main business indices by the industrial enterprises will probably make corrections to the forecasts of the Russian economy development in 2007. If extremely positive results of first two months were not enough for it, March data will add optimism both to Forecasts and for Government.

According to the data of the Federal State Statistics Service the trend for industrial growth sustained this year. In February, according to the Center for Macroeconomic Analysis and Short-Term Forecasting information, the high value of the industrial production index to the corresponding period of the previous year sustained 108.7%. The main factor that accounted for such a growth rate was the effect of low base last February the value of the corresponding index was only 101.0%.

Latest estimations of the dynamics of the main business indices by the industrial enterprises will probably make corrections to the forecasts of the Russian economy development in 2007. If extremely positive results of first two months were not enough for it, March data will add optimism both to Forecasts and for Government.

At first, the demand for industrial production picks up growth rates. In March initial, not cleared from seasonality, data demonstrated the increase in growth intensity up to 38 balance points, which is an absolute maximum over the whole period of monitoring and exceeds by twofold the results of March 2006. Exclusion of seasonal factor demonstrated the growth with the intensity of 24 balance points, which is also an absolute maximum and exceeds by 3 points the previous maximum, which was observed in January 2007. The demand is growing in all branches of industry, being especially intensive in fuel, metallurgic, food and machine-building industries. 2/3 of Russian industrial enterprises are satisfied with the volumes of sales. In power industry, fuel and metallurgic industry, the satisfaction with the demand exceeds 90%. In food processing it is equal to 80%, in chemistry and petrochemistry to 76%, in machine-building 65%. The lowest level of satisfaction with the demand is preserved in light industry (44%).

Second, high demand growth rates and increasing resources limitations for output force more and more enterprises to use the stocks of finished commodities to satisfy new customers. It is not possible now to replenish the stocks to the level of surplus that was usual one or two years ago: the production goes to customers straight from the workshops. As a result the balance of stocks estimations in 2007 is only +2..+3 b.p. A year ago it was in the range of +11..+14 b.p.

Third, good growth rates and the decrease in the finished commodities stocks enable enterprises to sustain high output growth rates. In March data, not cleared from seasonality, demonstrated production growth with the intensity of 54 b.p., which is an absolute maximum and exceeds the results of March 2006 by 12 b.p.

After exclusion of the seasonal factor the output growth rates in March were equal to 31 b.p., which is a second rank result from 1992. The best result was observed in 2007.

Fourth, the availability of credits for Russian industry continues to expand. In I quarter 2007 already 76% of the enterprises had a normal access to borrowed funds (a record value for 2000-2007). In fuel industry this index is equal to 100%, in power industry to 86%, in metallurgy and machine-building to 79%.

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