Alexei Devyatov of Troika Dialog -
With incomes and retail falling, Troika Dialog believes the Russian economy is on the brink of a deceleration cycle. Construction and investment are both down already, and these are usually leading indicators of what will happen next.
January statistics disappointing...
Rosstat on February 17 published its monthly economic bulletin, which showed that the economy slowed in January. Capital investment was down 79.6% on month and 4.7% on year in January (versus a 10.1% increase in December), which was far below the consensus (10.2% growth) and our estimate (12% growth). According to Economic Development Minister Elvira Nabuillina, despite a dramatic investment slump, GDP growth in January was 4.3% on year. However, seasonally adjusted GDP was down 0.3% on month, suggesting that after strong growth in the fourth quarter of 2010, the Russian economy has reached another deceleration cycle.
... but economy keeps growing
After rising 4.3% on month in December, industrial output was down 10.9% on month in January due to seasonal factors (the New Year holidays) and up 6.7% on year. Unemployment was up to 7.6% from 7.2% a month earlier. Real disposable income was down 5.5% on year versus a 3.3% on year increase in December. Despite falling 25% on month, retail sales grew a modest 0.5% on year versus 3.4% on year growth in December. Construction fell 71.5% on month and decelerated to a 1.1% on year decrease (it was up 11.6% in December). Agricultural output was in positive territory, showing 0.7% year-on-year growth (and an 18.9% month-on-month decline) after 0.6% year-on-year growth in December (28.3% month-on-month decline).
Economy on brink of deceleration
The January statistics indicate that the Russian economy is at the beginning of a deceleration cycle. The standard business-cycle theory tells us that investment and construction decline is a clear sign of upcoming deceleration.
The breakdown of 2010 recovery shows that with oil at $80-90 per barrel, Russia relies on internal rather than external growth sources, meaning that strong domestic demand is at the heart of growth. Strong demand is impossible without strong incomes growth. However, for the past five months, we have seen consistent deceleration in real incomes and retail sales, which is hitting domestic demand now. Weaker demand leads to deceleration in production and GDP and to further decreases in incomes and so on. We now think that the likelihood of deceleration is substantial over the next few months, which may put our full-year forecast at a downside risk.
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