Russia’s statistics agency released a slew of numbers for June and revised the May numbers. The bottom line is while the economy took a hit from the bad weather in May, the recovery is broadly on track and life is starting to look better for the man in the street after two years of grinding pain. Real disposable incomes and construction are both in the black again after years of decline.
The most important change is that not only are nominal and real wages still in the black (although there were some downward revisions), but real disposable incomes (inflation nominal income minus the cost of food and utilities) finally went positive after over two years of decline.
Real wage growth was moderated in June in the revisions due to May’s storm bump. Nominal and real wage growth prints were revised down significantly from 7.9% year-on-year and 3.7% y/y to 7.0% and 2.8%, respectively. However, the nominal wage increases are now running well ahead of inflation of 4.3%, despite the fact that inflation has ticked up in the last two months thanks to rising fruit and veg prices.
The Ministry for Economic Development (MED) flash estimates for June for nominal and real wages are an improvement on May at 7.4% and 2.9%, which underscores that the recovery is ongoing.
Add to this that wage growth in the private sector was robust in May, excluding financial services that faced another one-off: a -3.0% y/y decline, after the +28.3% y/y spike in April. The public sector added less than in April (5.1% y/y vs. 6.8% earlier), caused by the slowdown in public administration and defence: currently 2.7% y/y, compared with 8.1% the month before. However, all these numbers (except for the bankers) are also ahead of inflation.
But the big nut was real disposable income left the negative territory, and was flat y/y for the first time in years. While real income has been growing for over half a year, real disposable incomes have been falling heavily and that is pain that the Russian people have felt. It has undermined shopping trends and also the political polls. Real disposable income had been printing in the red almost since the end of 2014 (except December 2015 and January 2017, when pensioners were granted an additional RUB5000 payment). VTB Capital (VTBC) said in a note that they don’t believe this is on a one-off event, but the start of a new trend, supported by the recovery in profits and interest income.
The start of an uplift in consumer sentiment is already visible in retail sales turnover, which continued to improve after going into the back a few months ago. Retail sales turnover was up 1.2% y/y from 0.7% in May, when it went into the black for the first time in several years.
Within retail sales the food segment is the one that is suffering as the bad weather really hurt fruit and veg production. That led both to a rise in inflation as well as a fall in retail turnover.
Food sales worsened, declining -0.6% y/y vs. -0.4% in May, after the steady improvement since March. VTBC believe that this reflects consumers’ intention to cut down on everyday expenses, which originated from the 11.6% y/y (and 8.3% m/m) price uptick in fruit and vegetables in June and spread to a broader range of food items.
However, the other segments in non-food retail to expand and the government says it expects fruit and veg prices to start falling fast now the harvest season has started. The non-food segment added 2.9% y/y, compared with 1.8% y/y growth in May.
Consumption is one of the three big drivers of the Russian economy and there was also a recover in the second one: the recovery in the value of construction works was robust and gained for the second month in the row, up this time by a strong 5.3% y/y after almost three and half years of decline.
“The food category might continue to restrain consumption from a more significant recovery in July, as the new harvest has started to arrive more actively of late, pushing fruits & vegetables prices down with a delay in seasonality of 2-3 weeks. However, based on our estimates, fruits & vegetables prices might start on a path of steady deflation in August (-9.9% MoM) and calm consumers’ concerns,” VTBC wrote.