BOFIT Forecast for Russia 2024–2026: Labour shortages and capacity constraints increasingly binding

The latest forecast from BOFIT, the Bank of Finland’s Institute for Emerging Economies, sees Russian economic growth this year exceeding its previous estimate made last April. The higher 2024 growth reflects a stronger-than-expected first-half performance due to robust increases in the capital stock and surging consumer demand. The new forecast raises the overall growth forecast for 2024 by 1.5 percentage points to 3½ percent. Russian economic growth is expected to slow in 2025 and 2026 to around 1 % p.a., a level close to the country’s long-term potential growth rate.

Sinikka Parviainen, BOFIT senior economist notes: “The economic slowdown we are presently witnessing largely reflects labour shortages and capacity constraints. High growth is extremely unlikely going forward as it would require large productivity gains. This is unlikely as large part of investment in Russia today goes to military industries or sectors servicing the war effort.”

Russia’s own actions and Western sanctions have also limited the country’s access to critical technologies and access to international supply chains.

First-half economic growth exceeded previous forecast

Consumer demand in Russia was fuelled by surprisingly strong growth in wages and the credit stock. As in previous years, part of this growth was a natural reflection of the government’s tendency to release the bulk of budget spending in the first half of the year.

Given the changed circumstances, we have revised upwards our April forecast for 2024 to 3½ percent. The drivers of economic growth continue to be robust consumer demand and capital investment in military production. Even so, fixed investment growth should be slightly lower than in 2023, which saw strong inventory growth as well.

Labour shortages, capacity constraints and import restrictions are expected hobble economic growth in coming months and years. Russia’s rate of capacity utilisation, which has risen rapidly since 2021, is now at historical highs. Sanctions have curtailed Russia’s access to new machinery and equipment, as well as spare parts – a situation that has again deteriorated since late 2023.

High growth unlikely

The prospect of buoyant economic growth in 2025–2026 is now extremely remote. Russian economic should barely exceed 1 % p.a. growth during the next two years. This level of growth is close to the Russian economy’s long-term potential growth rate.

Our forecast is again subject to a high uncertainty due to Russia’s decisions to discontinue the release of critical data series and the resulting analytical impediments. Given Russia’s myopic policy shifts, conditions in its wartime economy could change suddenly.

The latest forecast document is posted at https://www.bofit.fi/en/forecasting/latest-forecast-for-russia/.

Forecast will be presented at BOFIT's English-language webinar on October 1, 2024 at 16.00 hours (EEST).

For further information:

Iikka Korhonen, head of research, iikka.korhonen@bof.fi

Sinikka Parviainen, senior economist, sinikka.parviainen@bof.fi