“Salaries were growing slower than inflation” — economists sceptical about Rosstat’s data

The Russian Statistics Service has surprised the Russians by stating that their real incomes have risen sharply in the third quarter of the year

“Salaries were growing slower than inflation” — economists sceptical about Rosstat’s data Photo: Anton Zhuravlyov

Economists are sceptical about the statement of the Russian Statistics Service (Rosstat) about the sharp growth of real incomes of the population in the third quarter of the year immediately by 3%, almost for the first time since 2013. The ministry of economic development is also critical of the published data. The department has noted that if earnings grow this year, then only by 0,1% — due to the problem of the debt overburden of Russian citizens. Experts stressed that Rosstat is not the first time changing the method of calculation and does it probably not to be reprimanded. The inclusion in these calculations of the grey labour market, which nobody knows how the agency calculates, also raises doubts. Economists Sergey Khestanov and Andrey Movchan explained to Realnoe Vremya how the statistics service could be wrong, why the real incomes of Russians today cannot grow and what high consumer inflation and the strange paradox — when a person drops out the category of self-sufficient and begins to take out loans, his consumption grows and, as a consequence, loan payments also grow, which further reduces his real income — have to do with this.

Rosstat has surprised the Russians by stating that their real incomes have increased

Rosstat has unexpectedly surprised Russians — both ordinary people and economists, by publishing the operational report on the social and economic situation of the population. The agency reported that in the third quarter the incomes of the citizens increased by 3%. To be precise, real cash income has risen by 3,3% compared to the third quarter of last year and only by 1,6% compared to the second quarter. And real disposable income (income minus mandatory payments, including interest on loans, adjusted for the consumer price index, that is, inflation) — by 3% and 1.7%, respectively.

What is interesting, Rosstat named the nominal average salary for August — 44,900 rubles (it is, of course, also hard to believe), but did not name the real salary. Nominal wages have allegedly increased by 6,8% compared to August 2018. In January-August 2019, the nominal salary was 46,100 rubles on average, while in the same period in 2018 — it was 42,300 rubles. Let us remind that in 2018 the real incomes fell, although the government expected the opposite. This year, the government of the Russian Federation initially predicted real income growth of 1%, but then had to adjust the forecast (see below).

However, the ministry of economic development predicts only a small increase in revenues due to consumer loans

Rosstat explained the sudden growth in real incomes (we have not seen such an annual growth since 2013 — then it grew by 4%) as follows: “The main reason is the outstripping growth of income from labour, which share amounted to 76,9% in the structure of earnings in the 3d quarter of 2019, as well as the low base of the 3d quarter of 2018.” The statistics service includes salaries, “other income from labour” (including grey wages, “which Rosstat estimates according to its methodology”), income from entrepreneurship, income from renting real estate and social benefits (for example, pensions) in real incomes.

According to Rosstat, income from work, including grey wages, in the third quarter increased by 7,3%, social benefits — by 6,3%, and income from property — by 5,8%. Some experts explain the positive statistics by that in the first half of 2018, the salaries for public sector employees before the presidential elections and after them were increased, but in the third quarter of 2018 this “pre-election” influence on incomes disappeared: hence the growth of income in relation to the third quarter of 2018. Others, agreeing with Rosstat, point to an increase in personal income tax revenues: “According to the Federal tax service as of September 1, 2019, budget revenues from personal income tax exceeded 2,5 trillion rubles, which is by 8,7% more than a year earlier.” Others justify the statistics, citing a slowdown in inflation (from 4% to 3,8% in September). The ministry of economic development of the Russian Federation, however, is sceptical about the data of Rosstat: there, the forecast of growth of real disposable income was reduced from 1% to 0,1% in 2019 “due to the deterioration of the forecast of growth of payments on consumer loans”.

“Most likely, ‘good data’ does not quite right reflect the reality yet”

The economic community is sceptical about the data provided by Rosstat also because the agency in recent years has repeatedly changed the method of calculation. In 2019, Rosstat switched to a new method of calculating real incomes and began to publish data on the indicator once a quarter, rather than once a month, as before. Sergey Khestanov, economist, Associate Professor at the Department of Financial Markets and Financial Engineering of Ranepa under the President of Russia, in an interview with the correspondent of Realnoe Vremya pointed out that Rosstat also changed the methodology for calculating GDP:

“They have published many times ‘good’ data on GDP growth, which caused, to put it mildly, motivated doubts about their reliability. But formally, Rosstat is free to establish any method. So, it is impossible to accuse it of incorrect data directly. It itself creates a methodology and then it itself applies it! But in fact, at the moment when the methodology changes, a number of data become not quite relevant. It will probably take at least three or four quarters, a year, before the data will again somehow represent reality. In the meantime, we can only express regret that these changes have occurred, and understand that, most likely, the ‘good data’ does not quite reflect the reality,” the economist believes.

If going beyond Rosstat’s data and to ask a question whether the real incomes of Russians can grow in the theory, then in order to answer this question positively, we need advancing rates of growth of a salary that in practice does not occur, notes Khestanov, or consumer inflation, which should not be confused with usual inflation — consumer one always is above (not only in our country but also in the majority of the countries) has to decrease strongly. But this is also not observed: by historical standards, although inflation is quite low, it is not so low as to lead to an increase in real incomes. Therefore, Sergey Khestanov called the Rosstat data “paradoxical”.

“If the grey economy could be ‘counted’, it would not be grey”

Andrey Movchan, an expert of Economic Policy programme at the Carnegie Moscow Centre, financier, investor, founder of the group of investment management companies Movchan's Group, commenting on these “paradoxical” data, admitted in an interview with the correspondent of Realnoe Vremya that it is not easy even for an economist to answer the question of its correctness:

“I sit (conditionally) in my office, I have a computer, there is a certain number of respondents with whom I interact. And some sources of very narrow statistics. And I don't have 10,000 people [like Rosstat does] who can be interviewed. And I cannot allow myself to state rigidly — ‘Rosstat is mistaken!’…

However, the problem with the Rosstat data, according to the economist, is that almost no indicator that forms real incomes has grown this year, at least significantly. First, wages were growing more slowly than inflation. It turns out that the indicator of salaries already falls away or even makes a negative component in the indicator of real income. Second, deposit rates have been falling this year, and therefore they have also contributed a negative component to income growth. Third, although dividend payments by large companies have been growing this year, the number of those receiving dividends is very small compared to the number of Russians, and this could not have a great effect on the growth of real incomes.

“It might have had an effect, but microscopic one. But let’s assume that this compensated for the fall in deposit rates. We still have income from renting real estate, they, I suppose, have also been falling this year, simply because the state with its taxes is pressing and the demand is becoming less (and for Russians, it is not very large income). We have revenues related to business activities, profits of private shareholders: this year they have not been growing but falling. We should not forget pensions, which are a problem, because of the pension reform, the pension payments are not so growing in the end. Taxes have increased — and the real income is obtained just after deducting all taxes. And there is, finally, a grey economy that no one knows how to ‘calculate’. If they could, it would be called a grey one,” the expert believes.

“Finally, we have a grey economy that no one knows how to ‘calculate’. If they could, it would not be called grey then,” the expert believes. Photo: volok-grad.ru

Movchan: Rosstat can thus fulfil the decrees of the president “not to be reprimanded”

However, Rosstat is sure that it can “calculate” it. In its report, they point out that, in addition to the growth of nominal wages, grey wages have also increased — by 7,3%. The share of income of individual entrepreneurs and temporary workers, as well as grey wages, has increased from 10,5% in the second quarter to 14,1% in the third quarter. “Rosstat can calculate this grey salary today one way and tomorrow — another. And the day after tomorrow it can ‘increase’ three times, and Rosstat can say: ‘We are doing well!” Andrey Movchan sarcastically commented on the methodology of the agency.

“I have listed almost a full list of indicators that affect real incomes. From all this list, we have not found anything that could affect the growth of real incomes of Russians, except for the shadow economy,” concludes the economist. “It's probably one of the two things. Perhaps, Rosstat just in this way [by publishing positive data] carries out the May Decrees of the President of the Russian Federation, not to be reprimanded, and does it with the help of the shadow economy, which it ‘calculates’ as it wants. Or Rosstat really knows how to magically determine the size of the shadow economy, it has really grown significantly.”

According to Rosstat, the monthly income of the Russian family should be at least 58,500 rubles for the family to have the opportunity to buy the bare essentials. Photo: d-russia.ru

“When a person comes out of the category of self-sufficient and begins to take out loans, his consumption ‘strangely’ increases”

The lack of real income has a strange effect on consumer inflation: although it would seem that if a person's real income falls, he will eventually consume and buy less. In theory, this might be the case. In practice, however, it turns out otherwise. This leads including to the growth of consumer lending:

“One of the simplest mechanisms is that when people use credit money, they spend, as a rule, more than when they use their own money. This effect is strange, but it is described in economics. The thing is that when a person drops out of the category of self-sufficient and begins to take out loans, his consumption ‘strangely’ increases. This is due to that these people are not highly educated, they usually do not know how to calculate very well and do not understand what is happening. Credit also gives people a false sense of opportunity: they say, I wanted something, went and bought, and I had nothing for it! Indeed, the growth of lending is quite large, as our ministers said with a sigh,” Movchan explains.

From the beginning of the summer, the minister of economic development of Russia in absentia on this subject argues with Head of the Central Bank Elvira Nabiullina. Oreshkin believes that “the bubble of unsecured consumer loans carries the risks of a recession”.

Nabiullina, recognizing that lending is really growing too fast, does not see a threat in this and ... called on the government just to increase the incomes of the population! Without consumer loans, GDP growth in the first quarter of 2019 could have fallen to zero, the Central Bank said in the heat of the dispute. Oreshkin replied: “The logic turns out interesting: the stronger we drive the population into a debt hole, the better it is.” He was supported by Minister of Finance of the Russian Federation Anton Siluanov, urging banks to lend better to businesses, not the population. The Central Bank was supported by Sberbank, the largest bank in terms of retail loan portfolio: German Gref’s subordinates see no bubble. Oreshkin, however, is confident that the credit bubble “will burst in 2021”.

“We have a lot of poor people in the country who are heavily indebted, and they are likely never to pay off their loans. There are not as many of them as in the West, but in the West, more people live on credit, they are less indebted in terms of their income, it is easier for them than for our people to pay back. Therefore it is harder for our people,” Andrey Movchan believes.

Maksim Oreshkin believes that credit bubble “will burst in 2021”. Photo: kremlin.ru

Consumer inflation today is due to lending growth, a distortion in the consumption levels and deficiency

In his opinion, consumer inflation in Russia is also affected by a very uneven distribution of incomes. This inflation is greater in the middle classes and the rich, and less in the segment of the poor (but there it also exists). In fact, according to Movchan, now consumer inflation is not so big compared to 2014-2015, when it was promoted by the falling ruble, oil prices and a sharp rise in the cost of imports.

“We have a lot of import-dependent industries, we are very dependent on imports, after all. And the sanctions have dealt a very strong blow because they have actually unleashed the hands of domestic producers in terms of reducing the quality of goods and increasing their prices. Then food inflation was, of course, crazy. This year nothing similar has happened, and this inflation is not as big as in previous years,” Andrey Movchan explained Realnoe Vremya. “Today, it is explained by the growth of lending, and distortions in the consumption of strata, and in some way the growth of the deficit. We certainly have a shortage in some product categories. Even at the consumption level of the lower classes. Including because we are forced to abandon imports (because it is very expensive, and the replacement is little, and it does not always correspond to the quality).”

Vladimir Putin in June 2019 still acknowledged that real incomes of citizens have been declining for several years, but said that “now gradually incomes have begun to recover”. Photo: kremlin.ru

By the way, Russian President Vladimir Putin himself in June 2019 still acknowledged that the real incomes of citizens have been declining for several years, but said that “now the incomes have gradually begun to recover”. In his opinion, the decline in real disposable income is influenced by the growth of spending by Russians, in particular, loan repayments:

“Banks are issuing loans to citizens, relatively speaking, secured by 40% of wages, which, of course, is fraught with problems. The Central Bank of Russia should pay attention to this because we do not need to inflate these bubbles in the economy. Nevertheless, citizens take out [loans], then pay [interest], and this goes into the negative, affects the real incomes of the population,” he said, actually agreeing with the position of Maksim Oreshkin.

By Sergey Afanasyev