Is it possible to ‘buy’ economic growth with high inflation, how demand ‘accumulated’ over years, what investments increase productivity, and where forecasters make a mistake: abstracts from the Financial Congress session dedicated to economic growth.
  |   Econs

In the Growth, Demand, and Potential: How Monetary Policy Influences Them session of the Financial Congress of the Bank of Russia, speakers discussed the main ‘macrovariables’, i.e. the supply and demand situation, and the near-term outlook for economic growth, inflation, as well as monetary and fiscal policy. Econs publishes abstracts of the speeches.


Mikhail Zadornov, economist:

  • Consumer demand is slowing: people have started to save more.

Lending no longer spurs demand. Over the first five months of 2025, corporate lending grew by 12% year on year, that is, it was just above inflation, while retail lending was up by 8.8%, that is, adjusted for inflation, it decreased. This was due to high interest rates and also to a change in the behavioural model. Households and many businesses began to save. The share of households’ income used for savings was about 3.5% in 2023, then it reached 8.6% in late 2024, and now it is already 10%. That is, people save every tenth rouble of their income. And, of course, the pace of retail that is the key indicator of consumer demand has declined. In general, all this corresponds with the overall situation, when first of all, consumption declines due to a shock. Then, pent-up demand is compensated by bank lending. Finally, everything stabilises until the next crisis.

  • However, the fiscal stimulus remains.

In 2025, the budget deficit has been raised (link in Russian) from ₽1.2 trillion to ₽3.8 trillion. As of the end of May 2025, for the first time, the federal budget nominal revenues were lower by 1% year on year, while expenditures increased by 20%. Along with the growth in natural monopolies’ rates, it is forecast (link in Russian) that the budget will continue to fuel demand by 10% on average in 2026.


Zhanna Smirnova, Director of Macroeconomic Analysis, JSC DOM.RF:

  • The budget will remain a proinflationary factor.

The challenges that resulted in the growth in budgetary expenditures have not disappeared, and the need to raise costs may only be greater. If inflation is lower in 2026, as everyone hopes, it will be more difficult for the Ministry of Finance to reject new requests.

  • People satisfy their pent-up demand that has accumulated over years.

If from 2010 to 2019, the accumulated increase in real disposable income was 2%, then in 2023–2024, it totalled 14%, i.e. seven times higher. Moreover, the income growth is shifted towards the low-income deciles. For example, the number of households with an income of up to ₽63,000 was 82% in 2021, then it decreased to 62% in 2024. And the percentage of households with an income exceeding ₽100,000 increased from 6% to 16%. It is obvious that this increase was driven, among other things, by indexation for the inflation rate, social transfers, etc., but nevertheless, the income growth factor is the main reason for increasing demand. Because now people have the opportunity to satisfy their pent-up demand that has accumulated over years, and their incomes have grown by only 2% for the last decade. And if we look at the pace of retail sales growth, then we can see an increase in consumption during the last two years, which is approximately equal to the previous increase over ten years. The production sector simply had no chance to quickly adjust to such an increase in demand, which resulted in price growth.

  • The inflation slowdown may be uneven.

There is a lot of talk about cyclical overheating in the Russian economy. In some sense, this is true. But classical cyclical overheating is a reaction only to the monetary policy rate. In the Russian economy, such cycles are caused by structural factors. This means that the slowdown in inflation and demand may be uneven, and the inflation path remains volatile.


Oleg Vyugin, professor, Faculty of Economic Sciences, HSE University:

  • Of the three components of economic growth, the only one available is productivity.

The formula for potential growth rates looks like this: the available number of labour resources multiplied by labour productivity and utilisation of production capacities. Furthermore, productivity depends too much on the technological level of production capacities. Labour resources in Russia are fully utilised, and the unemployment rate of 2.2% (link in Russian) means that there is no reserve. The utilisation of production capacities is about 85%, that is, they are almost fully utilised (the threshold level of capacity utilisation is determined by the non-accelerating inflation capacity utilisation (NAICU) rate, which is the level of capacity utilisation that does not increase inflation. A capacity utilisation of 100% would mean that with further growth in demand, production will not be able to satisfy it, and additional demand will only result in inflation). Therefore, only productivity may change.

However, the potential for productivity growth may only be estimated at 1.5–2% per annum. Stronger growth will require investments in technological modernisation. And, in general, the current investments can be euphemistically described as investments in ‘reinventing the bicycle’, that is, in recreating within Russia the technologies that are already exist worldwide. Moreover, the protectionist policy or rather the lobbying policy, which is widely pursued today, is another factor demonstrating that high productivity should not be expected, because it seems that the problems of technological backwardness are being resolved by adopting protectionist policies and closing markets to external influence. History shows that this is a road to nowhere.


Rodion Latypov, Chief Economist, VTB Group:

  •  It is impossible to ‘buy’ economic growth at the cost of high inflation.

The task of economic policy is to achieve the highest possible structural growth rates or potential. This is rather a task for government, but central banks also contribute to it. Since the smaller the gap between current and potential growth rates, the higher the structural rates will be in future. And to ensure that the economy’s deviation from potential or the output gap is minimal, this is rather a central bank’s objective. There is only one criterion for a significant deviation from potential, which is inflation exceeding the target. Contrary to the widespread belief, the price of the output gap will not merely be high, but it will result in rising inflation. it is impossible to stabilise inflation at 10% and thus ‘buy’ higher economic growth, because inflation will continue to rise and will not stabilise at a high level.

Therefore, growth above potential is dangerous as it may cause constantly growing inflation. Growth below potential is also critical because production capacities are idle, and workers lose their qualifications and skills, which finally leads to a decrease in the growth potential itself.

The inflation target and the economic growth potential are closely related to each other. A central bank targeting inflation has no choice between targeting inflation and returning GDP to the path of potential. These tasks are identical. Inflation will be stable at the target level when and only when aggregate demand in the economy is in line with production capacities or economic potential. That is, maintaining inflation near the target means maintaining aggregate demand at the level of potential. Currently, the output gap is about 2%, and as long as it remains, inflation will be above the target values. The assumptions about what the gap is and what the potential growth rate will be substantially influence the level of monetary policy tightness. If the output gap is 2% and the potential is, let’s say, 2%, then for the gap to implode, the GDP growth rate should be zero. If the gap is 2%, and the economy is growing at 1–2%, then the potential should be 3–4%.

  •  Two types of forecast errors.

There are two types of forecast errors. The first error type is to assume a high rate of potential but have a low one. In this case, the output gap will remain, and inflation will rise. The second error type is to make a conservative estimate of the growth potential in the forecast, and accordingly, pursue tighter monetary policy. In this case, GDP growth risks decreasing and falling below the potential (but it does not mean that it will lead to a recession), and inflation will reach the target a bit earlier. That is, it will result in higher potential with lower real growth, with inflation at the target level, and lower inflation expectations. The first error type is much more critical. Therefore, it is always better to be more conservative in forecasting.

No recession’

All the session participants also tried their hand at forecasting. The moderator, Deputy Governor of the Bank of Russia Alexey Zabotkin, asked them to make a forecast (slide in Russian) for three key macro parameters, namely GDP growth, inflation rate, and the key rate for 2025–2026.

As regards the key rate forecast, the session participants (over 160 people voted in total) were more optimistic than analysts. However, the consensus forecast of the latter ones has not yet been updated after the recent key rate decrease.

However, what is even more significant, Zabotkin noted, is that not a single survey participant expects a recession regardless of the level of the expected real key rate, the range of values of which in the audience’s forecast (slide in Russian) is extremely wide (5.5 – 13%). ‘When monetary policy is aimed at preventing the economy from overheating, GDP growth expectations depend very weakly, if ever, on expectations for the real key rate,’ he concluded. In other words, monetary policy aimed at eliminating overheating may lead to a temporary decrease in the economic growth rate due to its cooling and to a negative output gap, that is, growth below potential, but not to a recession.

Similarly, the session participants’ forecasts demonstrated that according to their expectations, economic growth may not be achieved as a result of high inflation. Ideas that high inflation may help economic growth have been communicated from time to time, including at the plenary session (link in Russian) of the Financial Congress. In the audience’s forecasts, there was also a sharp divergence between values for GDP growth (0.5–4.5%) and inflation (4.2–8%), but if there was a relation between them in expectations, then the graph (slide in Russian) would have an ascending cloud of dots. ‘It seems to me that the result is very obvious and closes the discussion about whether it is possible to achieve higher growth rates through higher inflation,’ Zabotkin said in conclusion.