This Recovery Isn't for Everyone as Inequality Reshapes Russia
(Bloomberg) -- A snapshot of Russia’s consumer welfare painted a picture of a country increasingly cleaved by inequality.
A surprise deterioration of retail sales in February, alongside an unexpected plunge in real disposable incomes, is adding to evidence of what Morgan Stanley is calling an “uneven consumer recovery” driven by rising disparity in wealth. Hardship in Russia broadly affects the working population, with about 5 million people receiving wages so low they remain below the poverty line, according to Deputy Prime Minister Olga Golodets.
While Russia’s recovery is pushing up against an already-stretched labor market, resulting in seven months of increases in real wages, smaller gains are reaching those lower down the income ladder. For the central bank, deeper inequality complicates the task of asserting control over prices, according to Igor Dmitriev, head of its monetary policy department.
Almost two-thirds of the population earned less than the average monthly income in the third quarter of last year, making them “most sensitive to growth in prices,” Dmitriev said in an interview. “Their contribution to inflation expectations is very large.”
While the Bank of Russia has already brought price growth close to its 4 percent goal from a peak of near 17 percent two years ago, it’s made less headway with turning around people’s expectations, which rose in February to remain at more than triple the target. Deepening income polarization means inequality may increasingly spill over into its policy choices.
“Despite tight fiscal policy, we see real-incomes growth this year supported by a pronounced inflation slowdown,” Morgan Stanley economist Alina Slyusarchuk said in a report. “However, low consumer confidence and the signs of rising inequality suggest that the recovery will be fragile and uneven among income groups.”
The top decile of the richest Russians controls 89 percent of all household wealth in the country, a share “significantly higher than any other major economic power,” Credit Suisse Group AG said in its latest Global Wealth Report last year. That compares with 78 percent in the U.S. and 73 percent for China. Russia has an estimated 96 billionaires, a total surpassed only by China and the U.S., according to Credit Suisse.
Less-well-off households, usually without savings and little access to loans, spend primarily on basic necessities and hardly react at all to changes in interest rates, the central bank said in its 2017-2019 policy guidelines. Wealthier households, on the other hand, are unresponsive because they spend such a small share of their incomes on staples.
- Real disposable incomes fell an annual 4.1 percent in February, worse than every forecast in a Bloomberg survey of nine economists, whose median was for 0.1 percent growth. Wages adjusted for inflation rose 1.3 percent from a year earlier, compared with a gain of 3.1 percent in January, according to the Federal Statistics Service.
- A contraction in retail sales, now at a record 26 months, unexpectedly deteriorated to a decline of 2.6 percent, while unemployment remained at 5.6 percent. Even when adjusted for the leap-year effect and two fewer working days in 2017, last month’s performance in retail sales is still seen close to or below zero on an annual basis, Sberbank CIB estimates.
- The February statistics are “negative” and “speak in favor of a rate cut” at the central bank’s meeting on Friday, Alfa Bank economists said in a report. VTB Capital believes the data are “largely neutral” for monetary policy
- Morgan Stanley sees consumption “moving into positive territory” in the first half and growing 1.1 percent in 2017 and 2.3 percent in 2018, following a drop of 9.8 percent in 2015 and 5 percent in 2016.
“Notwithstanding our view that technical factors are mostly responsible for the fall in growth rates, the data continue to show that the expansion of the economy is export-driven, while domestic demand measured by retail sales and construction remains relatively weak,” Goldman Sachs Group Inc. economist Clemens Grafe said in a report.
The crisis has hollowed out the middle class after it doubled in size during the oil boom that accompanied much of President Vladimir Putin’s rule. Now more people are falling behind even as a recovery gains momentum.
The paradox is that the rich-poor divide is only getting worse as the economy rebounds, according to the Russian government’s Analytical Center, an advisory body. Its February report found that inequality started to deepen in the second and third quarters of last year. The disparity in wealth, as measured by the Gini coefficient, was unchanged as of end-2016 from the previous year, according to the Federal Statistics Service.
“The changing trend in the dynamics of inequality coincide with a revival of the Russian economy in the middle of 2016,” Analytical Center experts led by Leonid Grigoriev said in the report.