Boosting consumer demand is one of the levers to accelerating the overall growth of the Russian economy. It accounts for over 50% of the national GDP. Against the backdrop of falling household incomes, the Russian consumer market has entered a recession, turning from the growth engine of the economy into its brake. While economists are arguing about the ways to support demand without igniting inflation, business is adapting to the new environment.
Consumer demand is a significant growth driver for the economy and industrial production.
According to the Federal State Statistics Service, the household final consumption expenditure accounts for more than a half of the Russian GDP use. In 2015–2016, the indicator stood at 52%.
Consumer demand was the main growth engine of the national economy after the recession of 2008–2009 due to the growth of social expenditure, salaries and lending.
However, in recent years consumption has become a brake on economic growth.
According to the Federal State Statistics Service, in 2015 and 2016, household expenditure dropped by 9.8% and 4.5%, while real GDP fell by 2.8% and 0.2%, respectively.
The decline was primarily due to shrinking household income. In 2016, real disposable household income fell by 5.9% compared to a decrease of 3.2% in 2015. In January 2017, it bounced back to growth supported by one-off payments to pensioners, but in February–March the recession resumed.
According to the GFK study The Russian Consumer in 2016: The Habit of Crisis, the share of those who saw a shrinkage of their income grew from 7% in 2015 to as much as 19% in July 2016.
Among other things, the decrease in consumption is due to household debt. In April 2017, every fourth rouble of household income in Russia was spent on servicing bank loans, according to the National Bureau of Credit Histories, and the debt load keeps growing.
Saving prevails over spending, and the continued growth in retail bank deposits is coupled with weak lending activity, as noted by the Bank of Russia.
The Government’s anti-crisis measures seek to stimulate consumer demand.
To this end, the automotive industry support programme stipulates government-subsidised auto loans.
Consumption is mainly supported in an indirect way, by boosting the competitive edge of domestic products. For instance, in 2017, the Ministry of Industry and Trade proposed to subsidise the companies which buy domestic food equipment and are willing to upgrade their facilities or expand their product range. This is expected to potentially reduce food prices for the end consumer.
A strategy for restoring the economy by supporting producers rather than end consumers is designed to eliminate the risks of inflation and growth in household debt.
Decreasing inflation and improving inflation expectations will reinforce the confidence of retail consumers and businesses, laying the ground for positive economic growth in the long term – this view is shared by both the Bank of Russia and the Government’s economic team. The Ministry of Economic Development expects consumers to gradually shift away from the predominantly saving model by 2018.
Their opponents, such as representatives of the Stolypin Club, call for an active economic policy by the Government, with an emphasis on stimulating investment rather than end consumption, too.
As the economists debate, businesses have to adjust to the new reality where consumers have become extremely price-sensitive.
The discounter format representing stores with a narrow product offering and low prices is clearly on the rise. Amid the overall decline in retail sales in 2016, discounter sales grew by 15.3% due to the growth of both the buying rate and the average ticket (Russian FMCG and Retail Development Trends, GFK, 2017).
Retail chains are streamlining their value propositions. For example, X5 Retail Group is shifting its focus towards consumers with average and below average income and cutting assortment in regional stores by a third to a half. (April International Academic Conference on Economic and Social Development, Higher School of Economics, 2017).
Private labels are used as a key consumption growth driver. In general, their selling price is typically just above the cost of production, so private label goods are usually the cheapest. Hence, DIXY, for instance, plans to increase its share of private labels from 15.5% in 2016 to 25% in 2017.