Our Analytics 19 june — 17:35

Economy has entered depression (Our analysis)



The growth of the world economy in the coming years, in all likelihood, will remain stable, if in the coming years the American financial bubbles do not burst out and the dollar is not devalued.

In the current year, after the global financial crisis, global growth has slightly increased, although in comparison with the previous decade, growth is still low. One of the key reasons is the slowdown in the growth of the Chinese economy, which for a long time has been considered the locomotive of the world economy. For decades, China has maintained its leadership by implementing a growth model through increased investment and exports, and is now moving to a new model: growth through consumption. And they manage to do it so far, the growth rates are at the level of 6-6.5%, and many countries can only envy them.

Global changes have swept the entire global economy. Structural changes are also taking place in the economies of developed countries. In particular, it becomes more energy-saving, which leads to a decrease in the energy intensity of GDP. As a consequence, demand for energy resources is also reduced, there is an oversupply. It is no accident that President Ilham Aliyev calls on the Azerbaijani public, and first of all officials, to forget about oil and change the export orientation. With such changes in the global economy, Azerbaijan will have to look for new export niches in world markets and in world value chains. And in order to realise this and achieve economic growth, we need to achieve growth in the efficiency of the public and private sectors, as well as improve the quality of governance. In addition, it is necessary to reduce production costs, increase labour productivity and investment, create new small and medium-sized enterprises, as well as conditions for their growth.

The necessity of such transformations is dictated by the time and the situation. By the way, the listed measures are also envisaged in the plan to improve the efficiency of the business environment and improve the country's position in international ratings, recently approved by the head of state. In general, this plan envisages urgent steps in 18 areas, which provide for the creation of a proper basis for the effective implementation of the Strategic Roadmap for the Development of the Country's Economy. Moreover, the plan of measures approved by the president includes not only the social and economic measures necessary for this, but also changes in the current legislation. Most of the measures outlined in the plan are designed for the near future - 2017-2018, while others should be implemented by 2021. And this gives grounds to believe that the economic reforms initiated in the country should simultaneously accelerate and deepen.

Forecasts are real, but...

According to the forecasts of the country's government and international financial institutions, in the coming years the Azerbaijani economy will grow. But real growth is expected to be minimal - at 2%. In addition, it is necessary to take into account the fact that when calculating the nominal GDP, as all economic experts admit, a statistical error at the same level is permissible. Therefore, it is not necessary to talk about real GDP growth at such low levels. To achieve the same sustainable economic growth and ensure investment flows, the real growth of our economy should be at least 5% per year. By the way, in the recent past it was the growth of investments in the economy that provided Azerbaijan with leadership in terms of GDP growth rates not only in the region, but also in the world.

It can be seen from the first chart that it was the anticipatory growth of investments in the economy that was ensurштп the GDP growth of Azerbaijan until 2014. But already in 2014, the real volume of investment in the economy began to fall, which led to an imminent reduction in real GDP. Today we are in such a structural crisis that it is impossible to achieve sustainable growth without a strong initiating investment impulse. And the forecasts of the government and international institutions, providing for a two per cent growth, do not allow us to achieve sustainable growth. In order to avoid any misunderstandings, we will immediately clarify one detail.

The same China and India show 6.5% growth, but, say, the US and Western Europe 2-3%. At the same time, the Western economy has always been and remains more developed, because here the GDP per capita is several times higher than that of the eastern countries. That is, every per cent of growth in the West by weight is much higher than the eastern equivalent. Therefore, Azerbaijan at this stage of development should not compete with the West, but focus on developing countries, including the eastern ones.

And now let's see how the government's economic policy is linked to the appeals of the head of state to overcome the current crisis situation. These calls are essentially simple: we need to create an economy that will not be heavily subjected to fluctuations in energy prices. And this requires a slightly different economic policy. Once again we want to note that oil is Azerbaijan's yesterday, its production is falling, and prices are far from the desired $100 per barrel. The oil factor, because of the impossibility of further production growth, will no longer be able to play its former role in GDP growth. And the natural gas factor will become significant in three years. Therefore, we should immediately switch to the non-oil factor vigorously.

But even here the situation, unfortunately, is ambiguous. The 2% GDP growth will not allow us to fully support the level and quality of life of the population under the current inflationary situation. Even if we assume that inflation will drop to 7%, the level of such an important indicator as the real disposable income of the population, in all probability, will not grow. Therefore, we maintain all the time that the improvement of any one indicator in a single economic organism cannot produce the expected effect, where everything is interconnected. Just as the same medicine can cure one disease, but at the same time lead to an aggravation of another disease. And each indicator must always be calculated in conjunction with other factors.

For further analysis we took as a basis a relatively favourable for the country's economy pre-crisis year 2014. Over the next two years (in 2015-2016), the growth of the nominal disposable income of the population was 14.9%, the nominal average salary in the country increased by 11.8%, and the inflation index was 16.9%. It turns out that compared to 2014, at the end of 2016, the real disposable income of the population fell by 2%, and the real average monthly salary fell by 5.1%.

At the same time, the total number of employees in the country is 1.6 million people with an average salary of 500 manats. Of these, 600,000 work in Baku, while in the regions 1 million people work. Moreover, in the regions the average monthly salary is significantly lower than the republican one and amounts to approximately 300-350 manats. Given the same inflation, the purchasing power of the population in the regions fell below the national average. The current picture cannot but cause concern. And if we do not manage to curb the ongoing crisis, our indicators, which already tell of the state of degradation, will increasingly narrow in real terms.

This trend continues in the current year: the purchasing power of the population continues to fall. In addition, with the expected small GDP growth and high inflation, the real level and government spending will continue to fall, aimed at maintaining basic social priorities. They have not grown in recent years, even in nominal terms. Simply put, these items of expenditure are narrowing compared to previous years.

Sadly enough, we have to note that the domestic economy will remain stagflationary this year (a situation in which the economic recession is combined with rising prices).

The second graph clearly shows that stagflation in the Azerbaijani economy began in early 2015. And if the government even achieves the desired minimum level of inflation in 2018, it is still possible that the economy, after prolonged stagflation, may already be in a state of stagnation (the state of the economy characterised by the stagnation of production and trade), which will cause other manifestations of the crisis. Because with stagnation, the efficiency of doing business falls sharply. To overcome such a complex negative process, business must ensure, at a minimum, a lower marginal level of profitability, in order to avoid bankruptcy. To prevent bankruptcy, business faces a difficult choice - either to modernise the production process, or to reduce the wages of hired workers, or to reduce their numbers.

Which of the above three choices will prefer the business before such a challenge? As noted above, stagflation decreases the physical volume of production of goods and services. In this regard, production capacity remains unloaded. Business itself finds it difficult to understand what type of crisis it is - a cyclical or structural. Therefore, even if the producer has savings in such a situation, modernisation of production facilities in order to reduce the cost of manufactured products becomes an unpromising matter for him. High bank rates (above 20%) and relatively low profitability of production (8-10%) make investments in modernisation of production for the Azerbaijani business extremely irrational. Rather than to get high risks and low profitability, it is preferable for businesses to invest their money in bank deposits.

If you cannot solve the modernisation problem, maybe you should lower your salary to employees? But the reduction in wages also lowers the motivation of the employee, who works on the principle of 'how they pay, so I work.' As a result, productivity falls, which leads to loss of business. Consequently, for the business, to stay afloat, there is no other way out, but a reduction in the number of working personnel. And this, along with social discontent, causes a decrease in effective demand, which is already observed in our economy. If by the end of 2014 the number of employees in the industry was 197,200, then in 2016 their number dropped to 192,700 people.

A vicious circle is formed: a decrease in demand causes a decrease in supply, and a decrease in supply, in turn, leads to a decrease in demand. And all this in the aggregate causes depression in the economy.

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