(Adds detail from report)
* Cuts 2012 growth forecast to 3.5 pct, 2013 to 3.6 pct * Inflation to overshoot target * Tight labour market threatens competitiveness * Government should "build buffers" against shocks By Maya Dyakina and Douglas Busvine
MOSCOW, Oct 8 (Reuters) - The World Bank slashed itseconomic growth forecasts for Russia on Monday and cautionedthat labour shortages would force up inflation even as theworld's ninth-largest economy slows.
The global development lender cut its forecast for economicgrowth this year to 3.5 percent from 3.9 percent previously,down from last's year's growth of 4.3 percent. It lowered its2013 outlook to 3.6 percent from 4.1 percent.
"Whereas early in the year, growth was rising and inflationdeclining, now growth is declining and inflation rising," theWorld Bank said in its twice-yearly Russian Economic Report.
"A challenging external environment and worsening sentimentamong businesses and consumers translate into weak growthprospects."
Stripping out the crisis years of 1998 and 2009, Russia'seconomy will grow at its slowest rate in a decade and a halfeven though the price of the country's main export - oil - isnear record levels, the bank noted.
Despite the loss of momentum, the bank expects the tightjobs market, a bad grain harvest and hikes in household utilitybills to push inflation to 6.5-7 percent by the end of 2012.
Consumer price growth will stay above the central bank'starget of 6 percent going into 2013. The central bank hikedinterest rates last month, in a move praised by the World Bankas helping put growth on a more sustainable footing.
Russia's jobs market is tight, indicating that the economyis overheating in key sectors, the World Bank said. That haspushed the headline rate of unemployment down to 5.2 percent -less than the trough that preceded the 2008 financial crisis.
Labour shortages have driven wage growth to 10 percent inthe first eight months of this year - outstripping productivitygains threefold and threatening to undermine Russia's economiccompetitiveness.
For now, Russia's public finances remain strong and thecurrent account surplus - even as it shrinks to a forecast 2.8percent of gross domestic product next year from 4.1 percentthis year - will more than cover expected net capital outflows.
But a 29 percent rise in nominal state spending thatpreceded Vladimir Putin's return to the Kremlin this year hasleft Russia more dependent than ever on high oil prices tobalance the books.
Stripping out oil and gas revenues, Russia would run afiscal deficit of 10.5 percent of GDP this year, up from 7.5percent of GDP last year, the World Bank estimates.
Its forecast rests on an assumption that oil prices willhold at around $105 per barrel, leading the World Bank toconclude that the Russian economy "remains vulnerable to termsof trade shocks".
The World Bank urged policy makers to build buffers againstexternal shocks that might hit Russia if the West fails to cometo terms with its sovereign debt crisis.
Spelling out its recommendations, the bank said Russiashould replenish the funds that save windfall oil revenues toinsure the budget against a rainy day, strengthen the centralbank's focus on inflation and tighten banking supervision.
(Writing by Douglas Busvine; Editing by Megan Davies/JeremyGaunt)
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Keywords: RUSSIA ECONOMY/WORLDBANK