Consumers at a crossroads

Household consumption fell by 1.4% in real terms in 2022 compared to the year before. Its largest volume was observed in February, which was followed by a more or less continuous decline (or stagnation) until November, and only at the end of the year did it begin to recover. The population’s real disposable income fell by 1% in 2022, but the negative dynamics of consumption were partly caused not by this, but by changes to consumer behavior — the share of income spent by households on goods and services declined, while the savings rate rose. This was driven by both precaution in the face of uncertain future income and changes in the availability of a number of goods and services.

In 2023, the significant deviations between macroeconomic forecasts for Russia are explained by, among other things, different conditions regarding the dynamics of household consumption. The most pessimistic forecasts are related to the expectation of subdued income growth and, more importantly, with the preservation of the precautionary motive (or even its strengthening amid exacerbation of the geopolitical situation). The conservative scenarios include ones that describe rather active demand for goods and services, which at the same time cannot be fully satisfied at current prices. Under these scenarios, a return of consumers to normal consumption practices is accompanied by heightened inflation and higher interest rates.

See, for example, the macroeconomic survey of the Bank of Russia, forecasts of the IMF, World Bank and the European Commission, the forecasts of the Russian Ministry of Economic Development and the Bank of Russia, and the consensus survey of Focus Economics.

Optimistic forecasts generally assume that consumers will return to a low savings rate and even the realization of so-called pent-up demand (usually for expensive goods). The conditions for these scenarios often include a very serious recovery of physical volumes of imports, as well as local producers possessing enough capacity to completely satisfy demand without a considerable rise in prices.

The dispute about the conditions can be resolved to some extent only when they begin to be implemented. At the moment, seven or eight macroeconomic indicators are available that help track changes in household behavior with varying degrees of delay (Table 1). Below are the main conclusions that can now be drawn based on the most recent performance of these indicators, without making any assumptions about the future.

1.       Real consumption has not reached the level of the end of 2021: depending on the reviewed indicator, the difference is 3–7%. Retail trade turnover in 2022 showed a somewhat deeper plunge than the statistical data on the end consumption of households, similar to high-frequency financial data (Fig. 1, Fig. 3).

2.       In early 2023, consumer sentiment of households grew much faster than the actual propensity to consume. In Q1, the share of incomes spent on goods and services was almost the same as before the crisis (Fig. 2), while consumer sentiment was better, according to polls.

3.       Late February–early March 2023 appeared to be more favorable for the consumer sector than April and early May. Weekly data on incoming financial flows shows that in Q1 2023, for several week in a row, sales may have been 6–7 pps more intensive than trend sales, but later they returned to the trend (Fig. 3).

4.      Sellers’ views evidence their confidence amid relatively volatile estimates of the actual demand dynamics. The business confidence index in retail trade recovered in Q1 2023 to the level of Q4 2021, while the balance of responses to the question about the actual change of the demand volume, although being 7 pps lower in Q1 than in the pre-crisis period, exceeded that volume as early as in April (Fig. 4).

Figure 1. Real retail trade turnover in 2022 shows a somewhat deeper plunge than the statistical data on the end consumption of households

Sources: Rosstat, ACRA

Figure 2. In early 2023, consumer sentiment of households grew much faster than the actual propensity to consume

Sources: Bank of Russia, Rosstat, ACRA

Figure 3. Late February–early March 2023 appeared to be more favorable for the consumer sector than April and early May

Sources: Bank of Russia, Rosstat, ACRA

Figure 4. Sellers’ views evidence their confidence amid relatively volatile estimates of the actual demand dynamics

Sources: Bank of Russia, Rosstat, ACRA

Table 1. Indicators that describe the current dynamics of consumer expenses

¹ Balance of responses to the question ‘How has the demand for products, goods and services changed?’ (seasonally smoothed by the Bank of Russia).

* Seasonally smoothed by ACRA.
** Deflated by ACRA.
Source: ACRA