Author`s name Alex Naumov

Fast economic growth in Russia raises overheating risk

The Russian GDP indicator for May has signaled the fastest rate of economic growth in 2008 so far, London-based VTB Bank Europe said in its latest GDP Indicator report released Thursday.

However, the GDP indicator was still at the low end of the range posted over 2007, VTB Bank Europe said.

The Total Activity Index rose to 59.2 in May from 57.9 in April, indicating a marked rate of private sector output growth in Russia mid-way through the second quarter.

"The Russian GDP indicator rose to record an annual increase of 6.5% in May, slightly up from the 6.4% rate recorded over the previous three months,” said Chris Green, senior economist at VTB Bank Europe Research, commenting on the survey. "Official statistics point to a more robust activity profile, with annual growth estimated at 8.4% in April, raising the prospect that the Russian economy may be overheating.”

Faster growth of total activity in May reflected an improved service sector performance, VTB Bank Europe said. In contrast, manufacturers registered their slowest rise in output since last November.

The GDP Indicator is derived from VTB Bank Europe's Purchasing Managers Indices (PMI), which are surveys of business conditions in the manufacturing and service sectors of Russia. By weighing together the output measures from these surveys, an indicator of total output is produced, Prime-Tass reports.

However the recent reports about inflation in Russia are not so optimistic. Russian inflation may accelerate to 14 percent this year and the risk of the economy overheating is mounting, an International Monetary Fund official said.

Consumer prices rose an annual 14.3 percent in April, a five- year high, stoked by global food price increases and rising domestic wages. The economy grew 8 percent in the first quarter, the Economy Ministry said in a preliminary estimate on April 17. Gross domestic product rose 8.1 percent for all of 2007.

“The risk is that inflation gradually increases to such a level that it requires a sharp tightening of monetary policy that could cause a slowdown in growth,” Poul Thomsen, head of the IMF mission in Russia, told reporters in Moscow today. The risk of the economy “overheating” is increasing, he said.

The economy may expand 7.8 percent this year because oil prices will remain high and the IMF doesn't expect any “serious impact” on Russia from global financial-market turmoil, Thomsen said. In 2007 inflation picked up to 11.9 percent, overshooting the government's target by more than three percentage points, Bloomberg reports.

“If demand grows by 15 percent in real terms in an economy with potential growth of around 7 percent, you are rapidly using up what spare capacity is available out there and you will see growth of inflationary pressures,” he said.

The government should re-focus monetary policy on controlling inflation by increasing the flexibility of the ruble's exchange rate, Thomsen said. Any delay may hurt growth, he said.

“Delaying a tightening now increases the risk that there will be the need for a more stronger monetary tightening in the future that could cause a period of below-potential GDP growth,” Thomsen said.

Source: agencies