Actuality, November, 26, 2007

Delay in economy

growth can occur
The investments in a fixed capital break the records on October, 2007.

First of all the overheat risk is connected with the fact that an increase of consumer incomes and charges noticeably overtakes the growth rates of economy.

In spite of the problems in the financial markets, the investment boom in Russia continues, so testifies the regular report of the Federal State Statistics Service (FSSS). After some delay of investment activity in August – September, 2007, the October data show the investments growth into the fixed capital up to 19,6 %. By the end of October, 2007 the number of economically active population is already 75,3 million people that is more than in 1992. Th is resource of economy growth is probably close to exhaustion.

According to the FSSS data published,

the investments into the fixed capital were RUR 627 bln.

on October, 2007. Its growth rates again were accelerated – from 16,1 % up to 19,6 % on September, 2007. For the first ten months of 2007 it was higher

than in January – October, 2006, by 20,9 %. The FSSS gives the growth rates through a real expression; through a nominal one it is much higher. So, in October, 2006 the investments were RUR 449 bln.

This is the very news that opens the FSSS comments of the last data in the majority of investment banks reviews. However, th is dynamics

is treated differently.

It is supposed in Troika Dialog Management Company that “the confident growth of investment activity is restored after some delay in August and September, caused by crisis in the world credit market”. Goldman Sachs is more cautious. It considers that “deterioration of crediting conditions has not completely influenced the investments”. At the same time, it is predicted that high rates of investments will be kept in 2008. Partly, it is connected with the investments growth of the state and state companies into the infrastructure. Renaissance Capital Management Company marks the “boom of real investments”, but believes, that “economy overheat” can limit it.

An overheat risk, first of all, is connected with the fact that an increase of incomes and consumer charges noticeably overtakes the growth rates of economy. GDP grew by 7,5 % for the first nine months of 2007. Real available incomes grow almost twice more quickly, comparing “October, 2007 to October, 2006” they increased by 14,6 %. The same growth rates are shown also by a turnover of retail sale (in October it has closely come to an inconceivable earlier level of RUR 1 trln. per month, and totaled RUR 990,5 bln.; the boundary will be crossed in 2007). As the free producing capacities are exhausted, the advancing demand growth at the limited supply leads to a price rise.

This affects not only consumer inflation. According to the official predictions it will reach even 11% in 2007. According to the FSSS, a price index of manufacturers “October to October” has increased by 14,2 %. Many goods, especially investment and building ones, rise in price much quicker. As it is marked by Renaissance Capital Management Company, according to the FSSS, cement has risen in price by 7% only for October, 2007.

The growth in building sector slows down a bit. Growth rates of “amount of works in construction” in October made up 19,4 %, though for the first ten months of 2007 they made up 23 %.

However, the analysts do not predict either the crisis phenomena in economy or development model changes. The development model remains the same, that is the growth based on investment and consumer demand. Thus, in spite of the fact that the present growth rates of people incomes and consumer demand are partly connected with pre-election promises realization and

are unstable in long-term outlook.

Nobody is ready to say when the incomes growth will stop increasing.

The economy suffers more from the manpower resources deficiency.

Unemployment is recordly low. It was only 5,8 % of economically active population by the end

of October, 2007 or 4,4 million people.

It was 5 million people a year ago. According to the analysts, it will lead to the salary growth in a private sector. However, in a financial sphere the salary growth has already stopped.

There is also one more confirmation of the depletion of the Russian economy resources growth in the FSSS data. The number of economically active population is 75,3 million people by the end of October, 2007. This is not only 1,1 million people more than a year ago, this is even more than in 1992.

It is indicative especially against the background of demographic recession. There are hardly many people left without a job in Russia nowadays.

It is clear that without labour productivity growth the delay of economy growth rates is inevitable.