One of Russia’s most important business cycle indicators, interest rates, were cut by a half percentage point at year end 2019. But don’t let the easing monetary policy fool you. Other critical economic signals show that the Russian Federation is also exhibiting dangerous economic bubbles that are trending into dangerous territory.
Based on history, downturns typically happen within roughly 8 to 16 months from a peak in a country’s Gross Domestic Product (GDP) performance on a Purchasing Power Parity (PPP) basis.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research found that there were 33 business cycles from 1854 to 2009.
The average length of an expansion is 38.7 months compared to 17.5 months during a recession. Historically, the longest economic contraction in the United States was the 1929 Great Depression that lasted 43 months. That’s more than double the 18-month duration for the Great Recession which began in 2007 and was caused by the real estate bubble created during the 1991 to 2001 boom states Cameron King in his analysis for Forbes.
Cyclical indicators are erratic with multiple major influences. Worse, there is no consensus for which indicators universally signal business cycles in all cases.
Nevertheless, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
Russia’s Leading Business Cycle Indicators
For the Russian Federation, 4 of the selected 5 leading indicators below fell over the 12 months preceding the latest reporting period. While Russia’s consumer confidence is hanging in there, more concerning is the real deterioration in both overall retail sales and new passenger car sales.
The Economist estimates that an economy hits its highest level about 18 months after interest rates begin to rise compared to 8 to 16 months for waning business and consumer confidence. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months), retail sales and building permits (2 to 3 months).
- Interest rates: 6.5% at Dec. 2019 (down -1% from 7.5%)
- Business confidence: 101.1263 points at Oct. 2019 (down -0.2% from 101.3)
- Consumer confidence: 99.75298 at Aug. 2019 (up 0.2% from 99.5571)
- Retail sales: Up 1.6% at Oct. 2019 (down -0.6% from up 2.2%)
- New car sales: 156,848 vehicles at Nov. 2019 (down -6.4% from 166,886)
Russia’s prime rate held at 5.5% back in 2013, lower than the latest 6.5% in December 2019.
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
The car sales metric specifies the number of new passenger cars sold irrespective of price.
Russia’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the Russian economy is healthy given the positive annual growth.
- GDP: US$4.349 trillion at Oct. 2019 (up 2.9% from $4.227 trillion)
- GDP per capita: $29,642 at Oct. 2019 (also up 2.9% from $28,797)
Please note that the Russian Federation’s share of the world’s overall GDP of $141.860 trillion was 3.1% at October 2019, same as one year earlier.
In addition, Russia’s GDP per capita income of $29,642 is about 1.6 times greater than the global average GDP per person of $18,391 as of October 2019.
Russia’s Lagging Business Cycle Indicators
Two of the selected 3 lagging indicators improved compared to the same metric in the prior year. There was a troubling increase in Russia’s inflation rate from 2018 to 2019.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 23.132% in 2019 (up 0.402% from 22.73%)
- Unemployment rate: 4.623% in 2019 (down -0.177% from 4.8%)
- Inflation rate: 4.68% in 2019 (up 1.802% from 2.878%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator that records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a crucial percentage based on a country’s total labor force (not its full population) since it profoundly impacts how many debtors can afford to pay their mortgages and other borrowings.
Another headline indicator is the inflation rate, benchmarking the percentage change in average consumer prices in a country over a one-year period.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on December 22, 2019
MarkLines Automotive Industry Portal, Russia Flash report, sales volume, 2019. Accessed on December 22, 2019
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on December 22, 2019
The Conference Board, Global Consumer Confidence Unchanged in Q3. Accessed on December 22, 2019
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on December 22, 2019
Trading Economics, Russia Interest Rate. Accessed on December 22, 2019
Wikipedia, Consumer confidence index. Accessed on December 22, 2019