WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

After two years of economic boom, growth momentum has weakened markedly. In the first four months of 2025, economic activity grew by a mere 1.6% and industrial production by 1.2% – and even that result is exclusively thanks to military production. With the war-related fiscal stimulus tapering off and sanctions-induced import substitution reaching its limits, a slowdown was only to be expected. However, the policy of double-digit real interest rates, motivated by a perceived need to bring inflation closer to the 4% target, has arguably made it much more pronounced. Overall credit expansion has stalled in real terms and the growth in household loans has turned negative, affecting demand for consumer durables and housing. With the cooling of demand, inflation had subsided to around 6% on an annualised basis by April (from double digits at the start of the year). In response, on 6 June the central bank cut the policy rate by 1 percentage point, to 20%, with further cuts likely to follow. Apart from supporting credit activity, monetary easing should also exert badly needed downward pressure on the rouble, which has appreciated by some 20% against the US dollar since the start of the year and – along with declining oil prices – has undermined government revenue. In the baseline scenario, we stick with our earlier forecast of 2% GDP growth for 2025. However, should further policy easing be delayed or proceed too slowly, growth may well end up being closer to 1-1.5% this year. For 2026-2027, our growth forecast has been revised downward, to below 2%, as the thaw in relations with the US – with the associated prospect of an easing of sanctions – looks increasingly unlikely to proceed much beyond its current stage.