Ivan Tchakarov of Renaissance Capital -
We downgrade our 2013 GDP growth forecast to 2.2%, from 3.0% previously. Our 3.0% growth forecast rested on three key assumptions: faster global growth, a recovery in domestic investment and accommodating monetary policy from the Central Bank of Russia (CBR). While global growth might indeed be faster, it will be so only marginally and Europe, taking in about half of Russian exports, is recovering more slowly than we expected.
The less promising global backdrop and the failure of the dissipation of the domestic risk premium, following the 2012 political cycle, to lift investment have led to more subdued Russian GDP growth, while the change of governor at the CBR has unfortunately not yet led to a much-needed, in our view, rate-cutting cycle. We are therefore cutting our growth expectations for the year to 2.2% (versus Bloomberg consensus of 2.6%).
Realised GDP data for the first half of 2013 strongly support the growth downgrade. Rosstat's announcement that GDP growth decelerated to only 1.2% on year in the second quarter came as a surprise to us and the market, signifying the economy's continuing struggle to perform against binding domestic and external constraints. The slowdown in the Russian economy has now been going on for six consecutive quarters, with year-on-year growth in the first quarter of 2013 at 4.8%, and in subsequent quarters 4.3%, 3.0%, 2.1% and 1.6%.
2013 GDP growth is consistent with Russia falling into the middle-income trap. Last year, we released "Let's play leapfrog", dated November 21, in which we argued that in 2013 Russia would reach per-capita income levels ($16,000 in constant 2005 international prices) at which fast-growing economies tend to fall into the middle-income trap. A slowdown in GDP growth of a similar magnitude to that observed in other economies suffering from the same disease would yield a post-middle-income-trap average growth rate of around 2.0% - ie. broadly in line with our new forecast for Russia's GDP growth in 2013 (we also downgrade our 2014 GDP growth estimate to 2.9% from 3.8%, versus Bloomberg consensus of 3.4%).
Our in-house RenCap-NES econometric model indicates continued weakness in underlying economic activity. According to the RenCap-NES GDP leading indicator, the fourth estimate (we will produce our final, fifth, estimate in September) of third-quarter Russian GDP growth is only 1.2% on year. This is on a par with the second-quarter 1.2% number and lower than the 1.6% year-on-year growth in the first quarter. The fourth estimate is based on information available as of end-July. We note that different predictors send contradictory signals. For example, the data suggest some improvements in the share of firms in sound financial condition and, at the same time, deteriorated expectations regarding the financial situation in the future. The reduced size of order books, both actual and expected, is not easy to reconcile with expected growth in equipment purchases. In our view, these conflicting patterns reflect a high level of uncertainty with regard to the state of aggregate demand in the short and medium term. On a quarter-on-quarter seasonally adjusted basis, our model forecasts a contraction of 0.4% in the third quarter.
We still expect to see growth accelerate in the second half of this year for four key reasons: 1) the first half of 2012 was a very high base, with GDP growing at 4.5%, while the second half was a low base, at only 2.6%. We are therefore likely to see a purely mathematical boost from this in the second half of this year; 2) the agricultural harvest is expected to be quite good this year, which will also be helpful; 3) the better harvest will mean lower food and overall price growth, so consumers' real purchasing power (incomes minus inflation) will improve in the second half; and 4) we expect interest rate cuts to finally start materialising in September, providing another helping hand to the economy. We are forecasting 50 basis points of cuts by year-end.
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