Russia's economy is highly depends on oil prices and I expect that the global oil prices will continue its bullish trend. Following OPEC's meeting in June, Russia is expected to increase oil production. Against the backdrop of the rising oil prices, Russia's trade surplus should significantly increase in 2018. Also I expect that the current account to remain in surplus in 2018-2022, driven by strong trade surpluses. Sanctions against Russia made negative effect on the foreign direct investment inflows, however I expect that these inflows will recover in 2019-2022. I believe in Russia's economy and bet on its stable growth in the mid-term.
I expect the slowdown in China's economic growth in the near-term, driven by reduction in domestic demand, which would be the main constraint on achieving ambitious plan of the government for economic expansion. Also I think that slowdown in industrial production will continue its negative trend and will lead to volatility in domestic financial markets, based on concerns about risks related to the trade outlook. Probably, US-China trade tensions will fresh strain and will make a negative direct impact on the Chinese economy. That's why I have bearish view on China's economy in the mid-term.
Russia's economy shows positive signs of recovery and returns to growth. The main engines of this recovery are: (1) improved and stable macroeconomic situation: low inflation, low unemployment rate, higher real wages (and, thus, domestic private demand), lower interest rates, etc., (2) improved business environment (e.g., Ease of doing business index, ranking of Russia: 2014 = 92, 2015 = 62, 2016 = 51, 2017 = 40, 2018 = 35), (3) favorable commodity prices. I assume that near-term risk associated with USA sanctions against Russian companies and USA increased import tariffs for steel and aluminum will not have significant effect for economy growth. However, there are some fundamental issues that could adversely affect Russian economy: (1) Russian banking system problems. Despite Central Bank's attempts to clean banking system, one should note that (a) these activities are rather costly (some estimate ~$40 ban up to now), (b) competitiveness is decreasing (as the share of private banks decreasing), (c) confidence of business in the banking system is low. (2) Decreasing productivity coupled with declining labor force (due to demographic). (3) Traditional dependence of Russian economy from oil and gas (mainly, due to high share of oil and gas income in Budget)
I expect that Brazil's economy will continue to recover from downfall in 2015-2016, as well as weak growth in 2017, and will show annual average real GDP growth at 2.6% in 2018-2022. Lower inflation and interest rates are supporting the growth of private consumption, given by stimulating retail sales and improving household and company balance sheets. However, the credit growth is weak, due to the banks haven't adapted to the sharp decline in the policy rate. In my view, by implementing fiscal reforms and pursuing a sensible policy, the next government could increase the investment, after falling by 25% in 2015-2016, and provide stable economic growth in 2018-2022. Therefore I have positive outlook for Brazil's economy.
I expect that China's economy growth will be more moderate in coming years (6 - 6.5%), however, that will mainly caused by Government's plan of 'high-quality development': reducing of imbalances in economy, reducing pollution, stabilization of financing sector. As a result, it is expected (1) further decline in investment due to capacity cuts and stricter pollution controls, (2) tighter credit conditions that will lead to demand decreasing. In the same time, government is likely to support the growth by fiscal stimulus (through SOE and infrastructure projects). I assume that long-term results could be mostly positive for China economy (despite lower growth in near-term). However, there are some challenges for Government in near and long-term perspective: 1) Possible trade war with USA (that could cost for China 1-2% of GDP growth). 2) Demographic: rapidly aging population, declining labor force (one of the key issue announced by The Chinese Academy of Social Sciences, a leading government think tank). 3) Unemployment growth, particularly, due to planned reducing of imbalances in economy and capacity cuts. Coupled with rising living cost, this problem might create a social instability in China. 4) Local governments debts. Despite China conducts tighter monetary policy to stabilize its financing sector, the real situation with local governments debts is opaque (due to local government financing vehicles, public-private partnerships and possible faking reporting data)
I think that further economic growth in India, with an average annual GDP growth of 7.6% in 2018-2023, will be supported by strong increases in private consumption and accelerating gross fixed investment. However, this will depend on progress in recapitalizing the banking sector, because a lack of broader reforms in the sector will continue to place constraints on lending activity. Also I see positive impact for the investor sentiment in government measures for improving the business environment, such as tax reforms and the increased digitalization of government-to-business services. However, India's trade deficit will remain high in 2018-2022, due to price of crude oil, which is India's largest import item in value terms. Exports will increase, but the rate of growth will be incommensurable in comparison with imports growth.
I believe that China is able to achieve its goal, announced in April 2018 by the Communist Party of China, to double real GDP by 2020 compared with the level in 2010, that would require real GDP growth to average at least 6.3% a year in 2018-2020. Money squeeze in 2017 will make negative impact on economic activity, however, I think this is likely to be offset by looser economic policy settings. Therefore consumption and investment growth will remain stable in 2018. The external sector is sensible to US-China trade tensions, but I don't expect an escalation into full-blown trade war that could have a major impact on GDP growth in China. And in spite this trade frictions I expect that China's large merchandise trade surplus will expand over 2018-2022. Also, according to my expectations, the consumer prices will grow by an average of 2.6% per year in 2018-2022
Despite recent stabilization in Brazilian economy after recession in 2015-2016, I assume that this recovery will be short-lived. The thing is, budget deficit remains high and its reduction might lead to both growth lowering (due to reduction of government spending) and social instability (due to unpopular measures such as raise the retirement age). As a result, political crisis is quite possible and, if so, that will lead to second wave of recession
The confrontation between Russia and the West intensified statist, nationalist and protectionist trends within the government. At this case the main priority for the Russian government will be economic sovereignty, which would be expressed by insulating the economy from external shocks. The main tools of this strategy include a large positive sovereign external asset position, protectionist measures to support domestic manufacturing through import substitution and a cautious approach to foreign investment. In my view the implementation of this strategy as part of transformation period will be associated with a slowdown in the Russian economy growth rate in the medium term. Also the weakness of most political and legal institutions, as well opaque governance system, will put additional pressure on the country in this transitory period.
After recession in 2015-2016 Brazil shows strong signs of recovery. The major problem of Brazil economy was high inflation that led to (1) decreased real consumption (coupled with high unemployment rate), (2) higher interest rate (for both households and government). Banco Central do Brazil was able to take prices under control and, thus, ensuring a healthy mix of falling inflation and lower interest rates. The result is economy growth due to (1) private consumption increasing, (2) unemployment decreasing, (3) export increasing. Nevertheless, budget deficit remains high and that creates risks. That is why I assume that next steps might be (1) limitation of government expenses, (2) privatization, (3) pension reform (particularly, unpopular measures such as raise the retirement age).
India's outlook is more positive as many investors and agencies think, but such a positive factors are something like promises of the government's projection. I am very skeptical on this. Around 40% of industrial facilities face with low capacity utilization rate, infrastructure is poor in comparison to China, many banks have on its balance a lot of non-performing assets wherethrough invested a lot into non-perspective sectors. Well, high-loaded investments in infrastructure is very critical for economy growth in India. But nowadays there is no any measurable action on it. Thus, I would suggest rather faded prospects for 2018-2019, but brighter right after 2019
I just want to express one interesting point on the corruption in military sector in Russia. You all remember that Russia's Military Defense Minister Mr. Anatoly Serdyukov had been accused for wasteful spending of multi-billions of rubles which were dedicated to military upgrade and development. And what did Mr. Putin..., he just fired him but simultaneously they announced that this was an unprecedented corruption in Military Sector. Secondly, during this particular time Russians had not been doing any independent movement in global geopolitical scene. But right after that Mr. Putin demonstrated all his strength, military strength. I am assured that this was a strategic rational for this: they just showed to the world that Military Sector was under the control of such a man like Mr. Serdyukov in order to lull the world into a false sense of security that there were all thefts from senior to juniors in military sector of Russia and thus no development was possible....One day I had a meeting with senior military officer and he told me that Mr. Serdyukov never was in touch with any military officer.. This means that the Minister Mr. Serdyukov was just a folding screen behind which the really development of military force was underway. Maybe this is untrue but logically reasonable. I do not want to say that Russia does not have a corruption, It has indeed but I think that that strategic sectors are under close control.
Russian economy is coming out of recession stronger and more stable than before despite western financial sanctions. Russian banks and companies considerable reduced their dependence on foreign debt. Personally, I am focused and domiciled in the USA and now I am becoming more interesting in the opportunity that offers Russian economy. As shown by many macro indicators, Russian economy has easily survived and is clearly not torn to ribbons while some high-ranking western officials cried from every corner. In my opinion, for the last 2 years many investors were forced to turn their backs from Russia that of course caused investing deficit, but now I suppose it is right time to come back, And I am highly likely to expect better growth in 2019 as the latest
Russian Government set 2% target growth for 2018 year, I would suggest two main factors which are the base of such growth forecast. Firstly, the growth of internal consumption due to inflation dropped (to 2-3 percent, a level never imaginable for Russia) which ultimately strengthen real wages and thus spending.. Secondly, oil prices, as we see there is a gradual and steady increase in global oil pricing high exceed 3 years history - above $70 per barrel, this brightens Russia's outlook. I would bet minimum 4% of GDP growth for the next 3 years
In most analysts report the outlook for India is largely positive notwithstanding the fact of its slowdown in 2017. Such a growth 7.3%-7.5% for the next two years 2018-2019 adds economy of India as a fastest growing emerging market in Asia and in the world. I would quote factors from UN report: positive forecast is supported by robust private consumption and public investment as well as ongoing structural reforms. Indian government plans to improve Goods and Service Tax as well as Bankruptcy Code which will lead to more efficient trend of growth in Long-run. Once the government of India continues to carry out structural reforms, prudent macro policies and redistribute towards infrastructural project - we may really bet a lot into India's outlook - merely 8% per year in GDP terms.
I heard that notwithstanding the sanctions a lot of German businessmen are keen to invest and 2-3 times more right after the presidential election. I personally met about 10 good wealth persons. In my estimates this would give 2-3pp. more in GDP. I bet that Russia is one of the top country to invest in amidst emerging markets.
The Brazilian government one month ago announced that GDP this year (2018 will grow faster and they wait recovery from the recession for the past 10 years. This is for optimists. I do not see real activity (as you know some big steps) to resolve structural problems in economy. Look, all they wants to do is to narrow a budget deficit by curtailing the social security system. This will not help. Obviously imho.
At the moment most annalists emphasize that this year China are faced with threats and so called big worries: (a) US tax reform which result in capital flow from China into the US, (b) tightening of financial and environmental regulations, (c) slowdown of housing and infrastructure construction in 2018-2019
Brazil is going through real serious budget problems: aging of population with the trimming of social security spending. This is the main drawback for growth potentials of the country . Most people thinks the future election may help. I am skeptical to this. I would suggest to increase pension age and to invest heavily on to the sectors to replace imports.
It is arguable but many experts are inclined to think that small and middle-scaled firms constitute the core of the economy of any country. If so, Russia is facing problems in its development, no economic dynamism, there is no environment in which we can expect innovation or entrepreneurship for such small and middle scaled business. But other experts thinks that backing on the experience of modern China and by-gone USSR they showed that the core of economy is government-linked large scale business. I think that both points of views are worth to take, but the level of corruption of Russia is very high and this is the major drawback, impediment of any possible development in Russia, excluding the military sector that is of direct control of Mr. Putin. But military sector may not balance the economy towards to a steady path of development.