Дума 2016

Основные вызовы для власти:

1. Значительное снижение реальных социальных выплат/пособий/пенсий электорату ЕР вследствие падения ВВП, резкого спада промышленного производства и  доходов экспорта, инфляции цен, а также отсутствия социально значимых товаров из-за санкций/контрсанкций
2. Снижение реальных зарплат в бюджетной сфере (медицина/образование/культура/наука) по тем же причинам.
3. Опережающий рост безработицы в дотационных регионах с очень высокой поддержкой ЕР
4. Рост экономического неравенства и поляризация доходов -дворцы/хижины
5. Политико-экономическое давление извне.

Monop-oil-y

Saudis initiated a number of processes, like larger discounts to oil price, which have to return the changing oil market to its long-term status. Historical oil producers (OPEC, Russia, ...) had a ten-year period of monopoly producing the highest profit for the countries with the lowermost net cost. The market was shared between the main producers. This was a good example of maximized monopoly profit. 

Shale oil is not a challenge to monopoly profit, but bears some danger for the main producers to lose their market shares at the price level of $100. The response to this challenge was very well measured. Saudis waited before the investments in expensive energy technologies, like shale, oil Canadian tar, offshore Arctic, renewable energy, etc., reached the stage of mass production with the highest debt to be paid back. The expected effect of  low oil price (we forecasted the possibility  of $22 per barrel in 2016) is complete destruction of alternative oil/energy sources. Moreover, Saudis made it clear to investors that energy projects beyond conventional oil extraction are risky for decades. European countries with costly renewable energy paid from taxes (i.e. from consumer demand) will suffer most by suppressing investments in profitable businesses. I admire Saudis. They effectively use monop-oil-y.

Russia and Brent - the history of love and fall

It is common place that the Russian economy critically depends on oil price. It this short post we present a simple forecast of the Russian real GDP per capita in 2015 as based on the link between the evolution of the Russian GDP and Brent price. We have borrowed the GDP data from the Total Economy Database (available on Briefing.com) and FRED .

Figure 1 presents the growth rates of Brent price and Russian GDP per capita since 1991.  To the Brent curve, we have added the expected oil price in 2015 - $60. This makes the growth rate in 2015 of -0.4 1/y, i.e. a 40% drop. Figure 1 demonstrates that the Russian economy is more stable than oil price. However, the influence of oil price fluctuations is clear. To illustrate the level of tradeoff between the change in Brent price and the growth of Russian economy we normalize both curves in Figure 1 to their respective (absolute) maximum values after 1995. (Before 2000, Russia passed through a ten-year period of fast recovery after the fall caused by the transition to capitalism since 1991.)  Figure 2 depicts both normalized curves. Here we see almost one-to-one correspondence between the major peaks in two curves, e.g. in 1999  (love history) and 2009 (decline and fall) .   When it comes to the largest changes, the Russian GDP per capita follows the Brent curve with a coefficient 1/6, i.e. the change of 6% in oil price is converted into a 1% change in the GDP per capita. 

Having the estimate of 40% fall in oil price in 2015 (this is a conservative estimate and some experts do not exclude $30 per barrel) one obtains a 7% fall in the Russian economy in 2015.

Figure 1. The growth rate (1/year) of Brent price and real GDP per capita in Russia. 

Figure 2. The growth rate (1/year) of Brent price and real GDP per capita in Russia normalized to their peak values after 2000. 

Germany – economic driver or vampire?

Euro was introduced (as notes and coins) in 2002. Since that time, the evolution of GDP per capita in European countries has been demonstrating distinct signs of separation between the countries within the Euro area and those which retain own currency.  Figure 1 below shows real GDP per capita (borrowed from the Total Economy Database on Briefing.com) normalized to the level observed in 2000 for several European economies. Sweden, UK, and Switzerland (dashed lines) have been growing faster than any of biggest European countries, except Germany.  We do not show smaller economies and the countries joined the Euro area later than 2002.  

Formally, Germany is the driver of the Euro area economy. But several countries outside the Euro area are doing much better than their neighbors joined the Euro area.

Might it be that Germany is not the driver of economic growth but kind of economic vampire?

Euro area, USA, China, India, Russia - economic growth

Here we present the evolution of GDP per capita (OECD dataset) for Euro area, USA, China, India, and Russia. In Figure 1, instead of presenting real GDP levels, we normalize all time series to their respective values in 2008. Euro area is the looser in term of growth – real GDP has gained 17% since 1995 with the peak in 2007.  Moreover, it is about 4% below the 2007 level with a negative trend.  

It might be surprising for some readers that USA had the same evolution between 1995 and 2011 with some minor deviations, but definitely has been growing at a larger rate than Euro area since 2011. In 2013, U.S. was marginally above the 2007 level.

China and India are winners in growth rate, but still are far behind in terms of GDP per capita level. Russia is in a middle position in both graphs.

Figure 1. Real GDP per head for several countries and Euro area all normalized to their respective levels in 2008.

Figure 2. Real GDP per head for several countries and Euro area.

Oil, 2016, Russia, WWIII

We have posted on all items in the title of this post separately. Briefly, we predicted oil price to fall to $30 in 2016. Russia is the country critically dependent on oil price. The best real GDP projections for Russia with oil at $60 still include a few years of recession and high inflation. These economic phenomena are famous to punish the poorest part of population - retirees and unqualified personnel. This is the root electorate of United Russia - the current power. In the shade of low oil price and partly demoralized electorate, Russia runs into the 2016 legislative elections. This is kind of perfect storm when all possible negative factors come together and, by positive feedback, multiply damaging power. 

This could be extremely heavy burden just for the Russian society if not the Ukraine conflict. Not exaggerating the degree of internal protests initiated by socio-economic degradation we cannot exclude fierce suppression of any kind protest since the beginning of 2015. West will pour some oil (irony) into the internal and external conflicts ... and WWIII.  

I feel panic.

The price of steel and iron will be falling

In March 2014, we posted on the falling producer price of steel and iron in 2014. This prediction was right and the PPI of iron and steel has been falling from 238.0 (January 2014) to 225.7 (November 2014). The overall PPI has also dropped by 7.2 points since March.  Here we report that we foresee no general change in the declining trend. In 2015, we expect that the producer price index of iron and steel will experience further fall together with oil and many other commodities.  Moreover, the overall PPI will be also falling and dragging consumer prices down.

For price prediction of various commodities, our general approach is based on the presence of long-term sustainable (linear and nonlinear) trends in the evolution of the CPI and PPI in the United States [1, 2]. The difference between components of these indices is not a random one but is rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities.

On Seeking Alpha, we first reported on the evolution of the producer price index (PPI) for iron and steel in July 2009. We compared our earlier prediction from 2008 with the actual evolution of the difference between the PPI of steel and iron and the headline PPI and made the following forecast:

“In the short run, one can expect a fast recovery of iron and steel prices to the level observed in January-March 2008, i.e. the index will reach the level 210 to 220. However, this recovery will not stretch into 2011, and the index of iron and steel will be declining in the long run to the level of 2001, as depicted in Figure 3. In other words, the period between 2008 and 2010 is characterized by very high volatility, which will fade away after 2011.”

Figure 1 in this post reproduces Figure 3 from the 2009 post, where the green line gives a prediction of the future evolution. Since 2009, we made several updates considering new data on both PPIs (June 2010, February 2012,  December 2012, August 2013). According to our long-term tradition, we revisit the previously predicted fall in the producer price index of steel and iron and formulate a preliminary hypothesis on the evolution in 2015-2016.  

Figure 2 displays the difference between the PPI and the index for iron and steel (BLS code 101) since 1985. Between 1985 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. The difference is characterized by a sharp decline between 2001 and 2008. Our main assumption described in the aforementioned post was absolutely right - the negative trend observed before 2008, after a short period of large fluctuations, started its transformation into a positive trend after 2010. In Figure 2, the (slightly updated according to actual data between 2009 and 2011) new trend is shown by green line. This trend suggests that the PPI grows faster than the index of steel and iron by approximately 2 units of index per year. This observation was valid between March and November 2014.

Figure 3 demonstrates the most recent period and confirms that our prediction for 2013 was correct – the difference fluctuates around the green line. As described in our previous post, the short-term growth in the price of iron and steel observed in November 2013 and January 2014 was a transient one (a fluctuation) and the difference returned to green line in the second quarter of 2014. 

We have to confirm our forecast that the difference will be growing fluctuating around the green line in 2015 and 2016. The price of iron and steel will be declining further before the difference reach ~10 to 20.  Investments is iron and steel related assets are likely not profitable. 

Figure 1. The prediction of steel and iron price made in 2009.

Figure 2. The difference of the PPI and the index of steel and iron for the period between January 1985 and November 2014. The green line was first introduced in 2008.

Figure 3. Same as in Figure 2 for the period between January 2005 and November 2014. Green line predicts the evolution of the difference after 2009.