Russian Economy Ministry Cuts 2010 GDP Forecast

Russia’s economy will expand less than previously estimated as lower income growth slows retail sales, Deputy Economy Minister Andrei Klepach said.

Gross domestic product will probably rise 3.8 percent this year, compared with a previous forecast of 4 percent, Klepach told reporters in Moscow today. The economy will show "positive dynamics" in the fourth quarter after shrinking on a seasonally adjusted basis in the third, he said.

Russia’s recovery from last year’s 7.9 percent contraction was hindered by a record heat wave, which hobbled agricultural output, forced some manufacturers to halt production and crimped consumer demand. The economy will be able to fully overcome its "crisis contraction" by the end of next year, Klepach said.

"The pause in growth is over," he said. "The economy in September and October demonstrated fairly good growth."

Higher investment is fueling growth more than previously expected, while household consumption is weaker on slower income growth, Klepach said.

Capital investment is set to rise 5.9 percent this year, up from the previous forecast of 2.5 percent, he said. Retail sales will probably increase 4.5 percent, less than the Economy Ministry’s earlier estimate of 5.2 percent. Disposable income is set to rise 3.8 percent this year, down from the previous forecast of 4.4 percent, he said.

‘Fairly Good’

"We see fairly good income growth, but it’s a little bit weaker" than expected even though unemployment is falling, Klepach said. "It looks like companies are already getting ready for future payroll-tax increases, which may be holding them back."

Payroll taxes Russian companies contribute to the national pension and health-care systems are set to rise to 34 percent in 2011 from about 26 percent this year. Small businesses will have a two-year grace period before they have to pay the higher rate of the tax, Russian President Dmitry Medvedev said on Nov. 30.

There is a greater likelihood economic growth will beat the Economy Ministry’s 3.8 percent forecast this year rather than miss it, Klepach said.

To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net