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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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Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Drivers of pre-crisis acceleration

3

Source: World Bank, IMF, WTO


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Catching up with the OECD

4

Source: WEF (2011). The Russia Global Competitiveness Report 2011, p.4


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Wages were crowding out profits

Gross profits and mixed income

Wages (including shadow earnings and mixed income)

5

Source:Rosstat, Gaidar Institute


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Success stories:

Telecommunications

Cell phone subscribers per 100 persons 2009 г.

Russia

Italy

Germany

Spain

France

USA

Japan

8

Source: MED


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Благодарю за внимание

Car ownership

Number of cars per 1000 inhabitants

10

10

Source^ the World Bank


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Success stories:

Financial penetration

Share of banking account holders, percent

Number of ATM per 1000 persons

Source: NISP, CSR

11


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

The share of the middle class

12

Source: Natalya Tikhonova


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Nutritional convergence

20

Source: CSR, RANH I GS


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Non-substantial consumption

21

Source: CSR, RANH I GS


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

…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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Non-food consumption dominated in retail sales

But now it comes to a halt

25


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Incomes were a priority issue

in early 2000-s

People’s “mandate" to Putin, 2002

27

27

Source: FOM


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

  • Housing became a top priority in 2012

Source: CSR

28

Source: CSR


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Housing convergence

29

Source: CSR, RANH I GS


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Accessibility index of housing with loans

32

Source: CSR


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

High housing ownership ratio may be an obstacle

Luxemburg

Norway

Switzerland

Russia


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

The end of global demographic dividend: the share of working age population declines

37

Source: City Research


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

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


Mikhail dmitriev research director center for strategic research iceur vienna 3 march 201 4

Thank you for attention!

42


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