What are the dangers of high growth rates of the country's GDP
About 12 years ago, there were discussions in Russian and foreign economic circles that the Russian economy was in deep stagnation and its future looked quite unenviable compared to the future of other fast-growing BRICS countries, especially China and India. There was a reason for such concerns, for example, in 2013–2014, since in 2013 Russian GDP grew by only 1.8%, and in 2014 — generally by 0.7%, although at the beginning of the first decade of the 21st century in Russia, GDP growth rates of 7-10% per year were considered the norm.
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However, it was in the first decade of the century, or more precisely, at the beginning of 2008, that the World Bank (WB) first spoke about “overheating”. Russian economy, but simply put, that high rates of economic growth in Russia — this turns out to be bad. Recall that economists usually call “overheating” a state of the economy when effective demand within the country grows significantly faster than the growth of supply, even if the entire country’s economy operates at full capacity utilization. «Overheating» may not necessarily be characteristic of the economy as a whole, but of individual markets — for example, the stock market or the labor market, but the main sign of such “overheating” is there must be a significant gap between supply and demand. A sign of «overheating» The country's economy is considered to have high inflation resulting from the limited supply of any goods.
Signs of “overheating” of the Russian economy in the World Bank in 2008, on the one hand, they called high inflation in the Russian Federation, which at the end of 2007 exceeded 10%, which was objective. But, on the other hand, the criteria for “overheating” World Bank experts also attributed an increase in Russian GDP by 8.5%, a reduction in unemployment to 6.1%, and even a reduction in the share of Russians living below the poverty line to 13.4% of the population (at the end of the 20th century this share exceeded 28%) . WB analysts were especially unhappy with the Russian Federation's GDP growth rate of 8.5%, since, according to their calculations, the Russian economy in 2000-2010 should have grown on average by no more than 6% per year.
Were the World Bank experts right when they predicted at the beginning of 2008 a future decline in the Russian economy due to the harsh diagnosis they themselves made? «overheating»? At first glance, they were. Indeed, at the end of 2008, the first large-scale economic crisis in the 21st century began in the world, which greatly affected even the G7 states, not to mention developing countries. At the end of 2008, the pace of Russian GDP slowed down to 5.3% due to the onset of the crisis, and in 2009 the domestic economy was expected to decline by 9%. Moreover, even after the crisis of 2008–2009, the Russian economy has not returned to the level of growth rates of the early 21st century.
It would seem that the negative forecast came true. However, you need to understand that both in economic theory and in life there are no clear criteria for “overheating,” since there is still no consensus on the level at which GDP growth rates a particular economy can be considered “overheated.” It is also not entirely clear in what cases the rise in consumer prices is a consequence of “overheating,” since inflation can rise even during an economic downturn (for example, in 2023 Argentina faced an economic contraction of 1.6% with inflation rising at 280% ). As a result, since the entire world was gripped by an economic crisis at the end of 2008, the conclusions that it was “overheating” that led to the Russian economy’s recession and subsequent slowdown in growth rates do not seem sufficiently substantiated.
There are only a few cases of an economic crisis in a country due to overheating of the national economy in the world. The most famous of these examples is the Lawson Boom. in Great Britain in the late 80s of the XX century. Then, on the initiative of the British Minister of Finance Nigel Lawson, personal income tax rates were reduced, which led to a sharp increase in the effective demand of the population, supply growth lagging behind demand growth, increased inflation in the country and a temporary depreciation of the British pound sterling. To cool the British economy, the government eventually had to raise taxes, and after this measure, “overheating” occurred. was eliminated. There have been no other similar cases in the global economy, although the World Bank and the IMF warned about the risk of “overheating”. the Chinese economy and the large-scale economic crisis in which the supposedly “overheated” China's economy can plunge the whole world when it begins to decline. In 2007, China's GDP grew by a record 14.2%. Subsequently, the rapid growth of China's economy did slow down (in 2023, Chinese GDP grew by only 5.2%), but nevertheless, today's even slower growth rates of the PRC economy still remain above the average growth rate of the world economy.
It is interesting that in the late 80s of the 20th century, Japan demonstrated high rates of economic growth by the standards of the G7 countries of 5-6% per year and was the largest creditor and investor in the US economy. And in the United States, as well as in global financial institutions, they started talking about “overheating.” and even a “bubble” of the Japanese economy, which allegedly arose as a result of the yen exchange rate being too high against the dollar and the capitalization of the Japanese stock market being too high. “Trees don’t grow to the sky,” — Alan Greenspan, appointed head of the US Federal Reserve System in the mid-1980s, said mysteriously, which was perceived in business circles as a delicate hint that it was time for the Japanese economy to “cool down,” otherwise there could be unpleasant consequences. Be that as it may, Japan stopped maintaining a high exchange rate of the yen, allowed its devaluation in the early 90s of the last century and, due to the severe economic crisis, ceased to be a major investor in the US economy. After which about “overheating” No one else mentioned the Japanese economy either at the Fed or at global financial institutions.
After 2008, the Russian economy experienced a series of crises, the stagnation of 2013-2014, and the coronavirus pandemic, together with the whole world, and is currently forced to function under conditions of Western sanctions of unprecedented scale. However, despite all these challenges, the Russian economy in 2023 still ranked fifth in the world in terms of GDP calculated at purchasing power parity (for comparison: at the beginning of 2008, in terms of GDP according to PPP, Russia ranked only 8th). e place in the world), and reached a growth rate of 3.6% in 2023. This turned out to be higher than the growth rate of the world economy, and today in Russia they are again talking about “overheating.” economy, even though if we compare the current growth rates of the country’s GDP with growth in the period from 2000 to 2008, we can rather talk about “underheating”. After all, if economic growth for Russia is 3.6% per year — this is “overheating”, then this means that “normal” annual growth rates for the Russian Federation should not exceed 2.5–3%, which is even lower than the 6% per year growth rate predicted by the World Bank in 2008 for the Russian economy.
Despite the fact that Russia last year became the fifth largest economy in the world in terms of GDP based on PPP (and has now risen to fourth place), its growth rate still lags behind that of China and India. Russia simply needs to develop its own high technologies, mechanical engineering and manufacturing industry so as not to be forever lagging behind in these areas compared to the rapidly developing countries of the global East and South and not rely solely on high prices for hydrocarbons, which the whole world, including developing countries, is gradually abandoning and switches to electric transport.
In our opinion, it does not matter whether the Russian economy is called “overheated” in the West. or not, will senseless discussions continue about how “dangerous” Russia is for Russia? growth rates are above 3–4% per year. It is important that the state allocates resources and creates a favorable investment climate for business so that domestic production of goods can satisfy the rapidly growing demand of the population. If the Russian economy manages to achieve this in the next few years, despite all the known geopolitical challenges, then the question of whether it is “overheated” it is either “underheated”, it will lose relevance.