Russia’s GDP growth slowed in Q2 while inflation continued to soar on the back of heavy state spending: report

Russia’s economic growth has come off the back of huge Kremlin spending on its military campaign in Ukraine, which it launched in February 2022.

While that spending helped quell earlier predictions of an imminent recession linked to Western sanctions, it has led to rampant inflation.

Inflation hit 9.13% year-on-year in July, the AFP report said, citing data from the Rosstat statistics agency.

The country has also been going through a consumption boom, driven by the state’s heavy defense spending and labor shortages.

“Consumer activity remains high amid a significant increase in households’ incomes and positive consumer sentiment,'” Russia’s central bank said in July.

“Labour shortages continue to grow. In these conditions, the growth in domestic demand does not result in a proportional expansion of the supply of goods and services but rather increases the costs of businesses and, consequently, intensifies inflationary pressures,” it added.

Russia’s central bank hiked its key interest rate to 18% last month after inflation “accelerated” and was “developing significantly above the Bank of Russia’s April forecast,” it said.

Russia’s economy is also facing a severe demographic crisis, with the nation’s population potentially shrinking by 50% by the end of the century, according to a report by the Atlantic Council written by Harley Balzer, an emeritus professor at Georgetown University.

The report highlights Russia’s long-standing population decline, which it says has now been exacerbated by the ongoing war in Ukraine.

This decline could increase pressure on Russia’s labor shortages and lead to lower growth and productivity.

“Unless Russia’s leaders can develop and finance a more effective set of policies, the only solutions to population decline will be a combination of incorporating non-Russian territory and/or immigration from Asia and Africa,” Balzer wrote in the report.