Russia’s GDP rose 2.2% y/y in 3Q17 due to the one-off support from agricultural sector and steadier acceleration of retail sales and will end the year with about 2.0-2.1% of growth as predicted.
The economy is recovering but it is fragile. At the ground level the population are feeling the pinch as there has been no trickle down. Anecdotal evidence suggests everyone amongst the population and SMEs is under pressure.
This may improve in the new year but unless there are some real and deep reforms after the March presidential elections the economy could stagnate. Consumer borrowing has recovered but corporate borrowing has not and the bulk of investment is being done by the government in mega-projects.
Given that the strong spike in the GDP growth rate to 2.5% y/y in 2Q17 was mainly considered a one-off, maintenance of the economic growth rate above the 2% mark could be regarded as a positive surprise.
Indeed, the industrial production growth rate significantly and expectedly declined from 3.8% y/y in 2Q17 to 1.4% y/y in 3Q17, but this negative effect was offset by two factors. Firstly, as we expected, the recovery in consumption became firmer, as growth in retail sales accelerated from 1.0% y/y in 2Q17 to 2.0% y/y in 3Q17.
Thanks to a positive grain harvest surprise this year, output in Russia’s agricultural sector accelerated sharply from -0.9% y/y in 2Q17 to +5.1% y/y in 3Q17. According to our estimates, this contributed 0.4 pps to the GDP growth rate in 3Q17.
Given that agricultural activity is seasonal in nature, it is unlikely to lend support to economic growth in 4Q17. However, consumption growth, in our view, could continue, which is why we do not exclude that our full-year guidance for GDP growth at 1.5% y/y could be exceeded.
Recent consumption growth has been relying more heavily on leverage and less on higher income. However, the potential negative effect on the inflationary trend is unlikely to be noticeable in the near future due to the effects from other disinflationary factors.
In particular, the lifting of the ban on tomato imports from Turkey starting November 1 should limit the seasonally driven spike in fruit and vegetable prices in Russia (4% of the total CPI basket) and lead to deceleration of inflation to a level below 3.2% y/y, which is our target for end 2017.
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