Russia's Economy Returns To Growth

The Russian GDP advanced 0.5 percent year-on-year in the first quarter of 2017, following 0.3 percent growth in the previous period and above market expectations of 0.4 percent, according to preliminary estimates. The economy is now recovering after two years recession, brought on by falling oil prices, western sanctions and a weak currency. The economy is expected to grow between one and two percent in 2017-2019, while further GDP growth calls for efficient structural government reforms. The main county’s challenges are continued heavy dependence on oil revenues, the weakness of public administration, lag in technological innovation, financial isolation and geopolitical tensions.

After solid growth in the first quarter, Russian private sector lost some momentum in April, with Composite PMI weakening to 6-month low. Manufacturing sector led the decline, as production softened substantially, reflecting slowdown in new orders. Meanwhile, services sector continued to demonstrate marked growth, as both activity and new orders rose for the 15th month running, signalling strong demand. Industrial output increased 0.8 percent year-on-year in March, following 2.7 percent drop in the previous period, mainly driven by metallurgy, machinery and equipment, transport manufacturing and coal mining. Also, the business confidence picked up to the highest level since August of 2013, amid more favorable production outlook, while lack of demand and high taxes seen as the main challenges. 

In March, trade surplus went up 61.7 percent year-on-year to USD 12.6 billion. Exports surged by 35.2 percent to USD 31.3 billion, mainly boosted by fuel and energy products; metals; chemicals; machinery and equipment and food. Sales rose for the fifth consecutive month after three years of contraction. Imports jumped 21.8 percent to USD 18.7 billion, driven by machinery and equipment; chemical products; textiles and footwear; metals and food.

The inflation has slowed down significantly, supported by the ruble appreciation, high food stocks due to the good harvests of 2015-2016, and tight monetary and credit policy, which helped to maintain a household savings behavior. In April, annual inflation stood at 4.1 percent and expect to reach a government target of 4 percent as early as next month. Following a faster decline in inflation, the Central bank lowered its benchmark interest rate already twice this year to 9.25 percent and signaled the possibility of further cuts in the second and third quarters. Inflation is forecasted to remain close to the government target of 4 percent during next years.

The labor market is adjusting to the new economic environment and the jobless rate remains at a consistently low level. The unemployment rate falls to 5.4 percent in March compared to 6 percent a year ago. The real wages returned to the growth while the real disposable income kept shrinking. Meantime, the country faces several problems as reduction of working-age population and ageing, in combination with one of the lowest retirement age in the world. This puts a heavy burden on the pension system. Although a gradual increase of the pension age is supported by most of experts and politicians, this step is highly unpopular among the public and can lead to social protests.

The retail sales declined by 0.4 percent year-on-year in March, the least since December of 2014. Also, new car sales showed the signs of recovery, rising for the second consecutive month by 6.9 percent in April, after falling during the last 4 years. Furthermore, in the first quarter, consumer confidence improved to the highest level since the third quarter of 2014, as households were less pessimistic about the country's economic situation, personal financial situation, and conditions for major purchases. 

Yekaterina Guchshina
5/18/2017 1:15:46 PM