Russia’s short-term economic growth has accelerated above its long term trend, defying weak global conditions. In 2007, the economy grew by 8.1 percent on the heels of very high (and perhaps unsustainable) oil prices, robust domestic demand and strong macroeconomic fundamentals. Preliminary data indicate an even faster real growth in GDP and industrial production of 8.7 and 6.2 percent in the first quarter of 2008. Rising inflation and capacity and labor utilization, tightening infrastructure constraints, and real wage increases outpacing productivity gains, however, suggest that the economy is overheating, i.e., aggregate demand is outpacing long-term productive capacity of the economy. Reducing inflation and reinvigorating the remaining structural reforms will be key policy challenges for the new Russian government going forward.
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