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Russian economy goes back to 2018 in a single quarter due to war

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In a bleak retelling of the war for Russia, an economy gathering speed in early 2022 entered a contraction during the second quarter. Data released on Friday showed gross domestic product contracted for the first time in more than a year, but less than expected, falling 4% annually.

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Factoring in lost output, GDP is now roughly equivalent to its size in 2018, according to Bloomberg Economics.

The international sanctions hit over the war disrupted trade and crippled industries such as autos, while consumer spending slowed. Although the economy’s contraction so far has not been as sharp as anticipated, the central bank expects the slump to worsen in coming quarters, reaching its lowest point in the first half of next year.

The economy will move toward a new long-run equilibrium”, Deputy Governor of the Bank of Russia Alexey Zabotkin told a briefing in Moscow. “As the economy undergoes restructuring, its growth will resume.”

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The Bank of Russia acted to contain the turmoil in the markets and the ruble with capital controls and sharp increases in interest rates. Enough calm has already returned to reverse many of those measures.

Fiscal stimulus and repeated rounds of monetary easing in recent months have also begun to take effect, mitigating the impact of international sanctions. Oil extraction has been recovering and household spending showed signs of stabilizing.

The crisis is moving along a very smooth trajectory”, said Evgeny Suvorov, chief Russia economist at CentroCredit Bank.

On Friday, the central bank published a draft of its policy outlook for the next three years, predicting that it will take until 2025 for the economy to return to its potential growth rate of 1.5%-2.5%. The bank’s projections for 2022-2024 were left unchanged, with GDP expected to contract between 4% and 6% and between 1% and 4% this year and next, respectively.

The report also included an alleged risk scenario in which global economic conditions deteriorate further and Russian exports will be subject to additional sanctions. If that happens, Russia’s economic recession next year may be deeper than during the 2009 global financial crisis, with growth only resuming in 2025.

Source: Gestion

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