Will it rain on our parade?
Kazakhstan’s economy has two vital determinants: The global price of oil, and financial activity. The government’s recent forecast of 7% growth in real GDP this year seems based on the expectation that oil prices, which have risen about three-fourths from trough-to-peak since early 2009, will always keep the economy afloat.
As a long-run expectation, this may seem reasonable: Oil prices have risen 600% since the late 1990s. But a short-run forecast – say, for six to nine months – must allow for price volatility. Rising oil prices fueled 7% growth in GDP for the first quarter of 2010, compared to the same period in 2009; but oil prices often fall as rapidly as they rise. In 2009, daily futures for light crude oil on the New York markets varied from $50 to $80 per barrel; and even in 2010, a relatively sedate year, they have ranged from $70 to $85. In addition, buyers will eventually substitute cheaper fuels or conservation for expensive oil.
Finally, the government’s forecast is weakened by the fact that it may be based on only one or two months of good performance (March and possibly April).
Astana’s forecasts have ignored the ill health of the financial industry. This month, the World Bank and the International Monetary Fund warned that bad loans were still rising as a share of all loans in Kazakhstan – to one fourth as of May. After visiting Kazakhstan, the IMF staff said the economy should recover “but remains constrained by banking sector difficulties…. Credit expansion is subdued despite ample bank liquidity, and activity in key sectors, such as construction and real estate, remains sluggish.” With “large international reserves and low debt,” the government can spend more to revive the economy, if need be. (In fact, the government has stepped up spending on school construction.) But it should try to strengthen the economy for the years to come, by regulating the finance industry and by avoiding recurrent public expenses such as pay hikes for bureaucrats. Overall, the IMF forecasts 4% growth this year. If all goes well, then the economy may grow 6% annually over the next five years.
The willingness of a family to finance a four- or five-year investment, like a college education, depends partly on its expectations of economic growth, since this determines much of a family’s income. One way to gauge these expectations is to look at leading and lagging indicators of economic activity. Not only are they inputs into expectations; some of them – such as real investment -- are based on expectations themselves.
For leading indicators, let’s look at real investment; for lagging indicators, wages and employment.
Leading indicators
Real investment. Investment in durable goods – especially fixed capital such as office buildings and heavy equipment – discloses primarily the expectations of companies for the national economy for the next few years. In a transition economy like Kazakhstan, few firms have built up enough in retained earnings to see through an investment that will pay off only after many years. They will invest only if they believe that the economy will grow rapidly enough to enable them to recoup investment costs in a few years.
By this indicator, companies in Kazakhstan in 2009 did not seem to expect a strong economic recovery in 2010 or 2011. Adjusting for inflation, total investment in fixed capital for January through August 2009 was down 5% from the same period for 2008. The picture is no brighter for 2010: Nominal fixed investment in the first three months of the year was 622 billion tenge ($4.1 billion), 2.7% below the same period of 2009 and only .3% above the same period for 2008. Adjusting for inflation, which the government estimates (optimistically) at 7% a year, fixed investment was nearly a tenth below that of the same quarter in 2009, although this period had been weakened by recession.
As in 2009, this stagnation is mainly due to pessimism in the city of Almaty, where fixed investment is a seventh below that for the same period of 2009. At least half of fixed investment in the first quarter of 2010 was in the Caspian region, especially in Atyrau, due to rising oil prices. These are continuing trends; for January through September 2009, fixed investment in the city of Almaty was a third below that of the same period of 2008.
Construction. As in 2009, pessimism pervades construction as much as it does fixed-capital investment in general. In nominal terms, home construction in the first quarter of 2010 was only two fifths of 2008. Construction in early 2008 may still have reflected the housing bubble; but even when compared to the first quarter of 2009, when the bubble had disappeared, nominal construction was down by a tenth. The value of home construction in Almaty in the first quarter of 2010 was down 40% from the same period of 2009. Contracted construction work in Almaty was down by nearly half.
Home construction in 2009 had all but collapsed. For January through August, the value of such building was only half of that in the same period for 2008. Data for the first quarter of 2010 indicate no recovery from the collapse. In 2009, decline disproportionately affected Astana, as well as the city and oblast of Almaty, because these areas accounted for three-fourths of home construction in Kazakhstan. Adjusted for inflation, home construction in Astana fell by three fourths; in the city of Almaty, by half.
In physical terms, the discouraging trends in construction of 2009 seem to continue, judging from the performance in the first quarter. In square meters, residential starts in Kazakhstan were down 6% as compared to the first quarter of 2009. The city of Almaty suffered a 15% fall. In terms of apartments, starts in Kazakhstan were holding steady at 12,000 for the first quarter of 2010; but the city of Almaty saw a fall of nearly a fifth from the first quarter of 2009, when the city had performed much better than in 2008. Perhaps apartments had been oversupplied in 2009. In early 2010, the hot spots in the nation for residential starts were Akmola and Pavlodar.
Adjusting for inflation, construction in Kazakhstan for January through August of 2009 was down by a fifth from the same period of 2008. In the three areas that accounted for almost half of all construction – the oblast of Atyrau and the cities of Astana and Almaty – building was down significantly. In Astana, it had decreased by almost half. The hot spots in 2009 for fixed capital, and for construction in particular, were Zhambyl and South Kazakhstan. These accounted for only minor shares of the nation’s stock of fixed capital.
Lagging indicators
Wages. These indicators usually lag the business cycle, since they are often fixed by contract.
Average real wages in Kazakhstan for the first quarter of 2010 were only 1.1% higher than in the same period for 2009, suggesting a glacial recovery. Some industries important to Almaty saw real wages decline: Finance and insurance, down 1.5%; hotel and food services, down 6.2%; education, down 3.1%. Despite the housing crash, wages rose 6.4% in real estate and 7.4% in construction. But in general, workers may have perceived too much excess capacity in the economy to permit them to demand substantial pay raises.
Employment. The employment rate, generally a lagging indicator of recovery, responds more quickly than the wage rate. The unemployment rate in Kazakhstan is seasonal, generally peaking in the first quarter of each year, probably due to weather. Since 2003, it has fallen steadily. The decline continued in the first quarter of 2010, relative to the same period of 2009. The fall in the unemployment rate for youths was twice as steep as that for workers in general. These trends are due to new jobs, not to the withdrawal of discouraged job-seekers. In fact, the number of inactive workers might have fallen slightly in the first quarter of 2010.
The bottom line -- and the silver lining
Kazakhstan is recovering slowly from the global recession that reduced oil demand and deflated real estate values. Its long-term prospects remain strong: Exports rose 70% in the first four months of 2010, relative to the same period in 2009, mainly on the strength of rising oil prices. But this income accrues mainly to the Caspian region. Almaty will benefit mainly from the secondary spending, which generally lags primary spending by a year or so. The silver lining in this thundercloud is that 2011 should be a strong year for Almaty. – Leon Taylor, tayloralmaty@gmail.com
All Kazakhstani data are from the Statistical Agency of Kazakhstan unless otherwise attributed.
Revised on June 22, 2010
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