CONSUMER DEMAND

Text by: Vladimir Gorelov,
Solid Invest Group
September 2001

The last few years have been associated with substantial vulnerability of consumer demand in Russia. As a result of the rouble devaluation in August 1998, real purchasing power decreased dramatically. However, the devaluation had also positive effects on the Russian economy. First of all, the decrease in purchasing power and in domestic manufacturing costs created the prerequisites imports to be substituted for domestic products and for export-oriented industries growth during the period from 1999 to the end of 2000. Industrial production recovery in that period, fuelled by high raw materials prices on the world market, resulted in increased real wages. Unfortunately, the accumulated growth in the household income has not been reflected in an adequate rise of consumer demand.

Retail trade and household spending

In the period from 1999 to the end of 2000, the Russian consumer market was reshaping after the financial crisis and devaluation of August 1998. Retail trade increased on average by 8.9% in 2000 compared to 1999 and amounted to 2251.4 billion roubles in total.

Growth was sustained in 2001. According to the results of the first half of 2001, retail trade turnover increased by 9.5% compared to the corresponding period of the previous year and amounted to 1364.1 billion roubles. The growth was also associated with structural changes. The growth rate for the retail trade in non-foods (the share of non-foods in total trade has increased since the end of 1999 from 51.0% to 53.5%) signals certain saturation of domestic demand for food and, thus, improving living conditions and consumer confidence.

The growth in the retail trade was associated with two main factors:

• An increase in the real disposable income of population;
• A decrease in the share of savings in the total disposable income in favour of purchasing goods and services. In 1997 only 68.4% of the total household income was consumed, while in 2001 the figure was 80.2%.

In household expenditures food is still a major article but the focus has started to shift gradually to non-foods and services since 1999.

The Money income of the population

The sharp decrease in the domestic consumer demand after the devaluation in 1998 was determined to a large extent by reduced purchasing power owing to high inflation, slow appreciation in wages and social security payments.

The sharpest decline was registered in 1999 when real income decreased 14.2%. Throughout the year 2000 there was a steady growth in the real disposable income of the population (9.3%) owing to a large extent to increases in pensions and wages to employees of budget-funded organizations, and by the partial repayment of wage arrears.

During 2001, the growth of household income continued. As of the first half of this year a 4.7% growth in disposable income was observed. Growth in real disposable income also continued to outpace inflation in 2001. However, real household income is still lower than it was before the crisis. According to Goscomstat data, at the end of June 2001 real disposable income of the population represented only 87% of that in December 1998.