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Business seminar in Vienna “The Russian Economy after Sochi”. The new Russian consumer: Preferences, socio-economic situation, consumption patterns. Mikhail Dmitriev Research Director Center for Strategic Research ICEUR, Vienna 3 March 201 4. Before the crisis:
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Business seminar in Vienna “The Russian Economy after Sochi” The new Russian consumer: Preferences, socio-economic situation, consumption patterns Mikhail Dmitriev Research Director Center for Strategic Research ICEUR, Vienna 3 March 2014
Before the crisis: Demographic dividend and a positive global labor supply shock Share of the working-age population Advanced economies World Emerging markets 2 Source: City Research, Mckinsey Global Institute
Drivers of pre-crisis acceleration 3 Source: World Bank, IMF, WTO
Catching up with the OECD 4 Source: WEF (2011). The Russia Global Competitiveness Report 2011, p.4
Wages were crowding out profits Gross profits and mixed income Wages (including shadow earnings and mixed income) 5 Source:Rosstat, Gaidar Institute
Wages were crowding out profits Credit-driven consumer boom Credit-driven consumer boom Outstanding loans to individuals, growth yoy Credit model of consumption Real disposable income Retail sales Source:Rosstat, CBR, Gaidar Institute 6 Source:Rosstat, Gaidar Institute
Благодарю за внимание Success stories: Retail and hotels Share in GDP Growth of sales 2000=100 Russia Germany UK France USA Russia Austria Germany Italy UK France Japan Canada Source: MED 7
Success stories: Telecommunications Cell phone subscribers per 100 persons 2009 г. Russia Italy Germany Spain France USA Japan 8 Source: MED
Success stories: Foreign tourism During last decade Russia rose from the 12th to the 7th place in the world in terms of tourist spending abroad Number of foreign tourist trips outside CIS, thousand Amount spend abroad, bln USD Source: UNWTO, Russian border authorities 9
Благодарю за внимание Car ownership Number of cars per 1000 inhabitants 10 10 Source^ the World Bank
Success stories: Financial penetration Share of banking account holders, percent Number of ATM per 1000 persons Source: NISP, CSR 11
The share of the middle class 12 Source: Natalya Tikhonova
Middle class projections By 2020 middle class may comprise up to 50% of adult population and up to 70% of the population of the large cities Source: calculations by S.Misikhina 13
Income and employment growth • During1999-2007 real disposable incomes real disposable incomes increased 2.4 times and real wages more than 3 times • Unemployment by ILO definition declined from 10.5% in 2000 to 5.1% in 2012 • Income inequality increased only marginally: in 10 years Gini increased – from 0.40to 0.42) • Poverty headcount reduced by over 2.5 times and continued to decline during the first phase of the global financial crisis • Incomes were growing rather uniformly across various income groups, so the benefits of growth were spread broadly 14 Source: Rosstat
POVERTY ALEVIATION • In 2001 0.9% of Russians were living on 1.25 $US on PPP a day. • Since 2008 this group is no longer observable in household surveys. • 6% of Russians in 2006 were living on less than 2 $US on PPP a day. • By 2009 there share declined more than 100 times – to just 0.05%. • Practically all Russian poor now belong to the low middle class by the World Bank definition (daily incomes between 2 and 13 $US a day). • Even if measured by the US poverty threshold (15.5 $US a day in 2010) Russian poverty headcount declined from 64.4% in 1999 to just 30.6% in 2010 15 Source: CSR, Russian Academy of National Economy and Civil Service
Alleviation of absolute poverty Between 2001 and 2009 the share of Russians living for 2 $US a day on PPP declined more than 100 times from 5.97% to 0.05% 16 Source: CSR, Russian Academy of National Economy and Civil Service
Благодарю за внимание Poverty in Russia and the USA In percent of the population • Share of Russians which were poor are by the US poverty criteria: • In 1999 – 64.4% • In 2010 - 30,6% 17 17
Covergence in non-substantial consumption • Developing countries’ poverty crtiteria are no longer applicable to Russia • Being poor in Russia no longer means absolute deprivation. • Vast majority of Russian poor can afford a certain degree of non-substantial consumption • In many ways the gap between them and the middle class is shrinking. • In 2005-2010 the gap between 1-2nd and 5-9th income deciles declined • in car ownership from 2.5 times to 1.9 times • in computer ownership – from 3.3 to 1.5 times. 18
High mobility between income groups facilitates convergence Periphery of the middle class Non-poor, non-middle class Periphery of poverty Underclass Generalized middle class no moves 1 group down 2 groups down 1 group up 2 groups up more than 2 groups up 19 Source: NISP
Nutritional convergence 20 Source: CSR, RANH I GS
Non-substantial consumption 21 Source: CSR, RANH I GS
The end of import- and credit-driven consumer boom is just behind the corner • Import-driven current consumption has already been close to saturation • Overconsumption of imported consumer goods and services has already contributed to ruble devaluation • Steady imports decline as a share of GDP will reduce incremental share of imports in consumption growth • Income growth, which was underpinning growth momentum until recently, has been stalled • Consumer credit boom also nearing the end: consumer debt servicing is already compatible with the volume of outstandingdebt growth 22
Economic openness diminishes Current account Trade balance Gross FDI (RHS) Trade balance Gross FDI (RHS) Current account * Est. 23 Source:Ren-Cap NES Macro Monitor
…but foreign debt dependency increases Gross foreign debt, end-year, bln $US (LHS) Foreign debt payments, in percent of export Export, % GDP Export, bln $US (RHS) * Est. 24 Источник:Ren-Cap NES Macro Monitor
Non-food consumption dominated in retail sales But now it comes to a halt 25
The next big things: non-tradables • Instead, consumption growth is likely to be focused on non-tradables: • housing • education • health; • infrastructure services (particularly in the public utilities sector). • Housing will be the most important of them all 26
Incomes were a priority issue in early 2000-s People’s “mandate" to Putin, 2002 27 27 Source: FOM
Housing became a top priority in 2012 Source: CSR 28 Source: CSR
Housing convergence 29 Source: CSR, RANH I GS
Housing stock dynamics • During 1980s housing stock increased by more than 30% • During the crisis of 1990sthe growth slowed down by the factor of 2 • During successful 2000s it grew by only 14% - less than during the previous decade Mlnsq m In individual ownership total 30 30 Source: Rosstat
Mortgage lending is underdeveloped • Due to high growth of consumer lending current consumption was increasing faster than incomes • Share of consumer loans in total lending to individuals neared 50%, against 20% which is typical to EU • On the contrary, by the size of the mortgage market Russia is lagging behind. • Mortgages were stimulating purchases on the secondary market but discouraged housing construction France Turkey Russia Austria Germany Hungary % of loan portfolio 31 Source:Trust-Bank
Accessibility index of housing with loans 32 Source: CSR
High housing ownership ratio may be an obstacle Luxemburg Norway Switzerland Russia
First and second baby-boom generations will determine consumption patterns until the middle of this century Second baby-boom generation Age 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80-89 90-99 >100 Total 34 Source: Rosstat, Center for Strategic Research
Uneven impact on unemployment • 2/3 of unemployment increase in advanced economies was delivered by the US and Spain • 60% of increase in the number of unemployed in emerging markets was generated by China and Russia 35 Source: ILO, IMF
Global demographic turnaround • In 2013 the share of working-age population in the world population began to decline after a long period of fast continuous growth • The end of demographic dividend directly affects all major regions but South Asia and Africa • China’s share of working-age population will decline in the next two decades almost as fast as that of Japan during 1990-2010 • Global labor supply is facing long-term slowdown • Future economic growth will be overshadowed by the negative labor supply shock 36
The end of global demographic dividend: the share of working age population declines 37 Source: City Research
Economic and labor market implications • Labor force decline will increase global returns on labor versus returns on capital • Average long-term wage growth may exceed growth of GDP per capita • Fast decline of labor supply will drive up China’s labor costs faster than ever, limiting export-led manufacturing growth and reducing trade surplus • Growing domestic consumption will suppress the investment rate and induce faster growth of services for domestic market • Working age population decline creates a powerful drag on productivity and economic growth • Shrinking labor force and growing labor costs in China and other emerging markets will ease pressure on employment in manufacturing and other tradables for the advanced economies • Domestic labor force decline and easing pressure from BRIC will accelerate wage growth in advanced economies • Demographic turnaround will contain the rebound of pre-crisis imbalances 38
One of economic implications: global drag on productivity growth • 1% decline in the share of working-age population was associated with productivity growth decline of 1.75-2.75% • China’s demographic supply shock implies that its average GDP growth for the next 20 years will stay below 6% 39 Source: City Research
Russia: double labor supply shock Change in real GDP growth rates: 2012-13 (percentage point) • Double labor supply shock: • Very fast decline of the working age population • Numerous and well-educated second baby-boomer generation entering labor market • Labor market outcomes: • Slow economic growth and productivity growth • Declining labor force (- 630,000 in 1Q-3Q 2013) • Net job destruction (- 780,000 in 1Q-3Q 2013) • High labor participation rate • Very low unemployment (5.3-5.6%) close to 20-year minimum • Very high youth unemployment (15.8 % in mid 2012 – 4 times higher than in the 30-49 years old age group) • Wages growth (5.6% 1H 2013) - much faster than GDP (below 1.5% 1H 2013) – at the expense of declining profits 40
Medium-term forecast (before the Ukranian crisis) 2010 2011 2012 2013 2014 2015 2016 GDP Final consumption Household consumption Government consumption Gross investments Export Import 41 Source: Gaidar Institute