Russia’s economic recovery gathered pace in the first quarter ending with 0.5% growth, bring the two year long recession to an end. The economy is on track to finish this year in the 1%-2% range.
However, this growth is still well below potential which has promoted the government to have another stab at reforms. Formally, the discussion of reform drafts started on 30 May when President Putin called a special meeting at which the two opposing camps of Boris Titov and former finance minister Kudrin presented their versions.
The main takeaways: Expect a protracted discussion as the Kremlin, which has presidential elections looming, wants to manage the process – both in timing and the content – to avoid disenfranchising elements of the electorate. Of greater concern -- and what will almost certainly happen -- is the Kremlin will chooses the ‘middle option’ to ensure social and economic stability for a few more years, albeit at the expense of wider social stagnation and a deeper degradation of the economy. Twelve months ahead of the presidential election the Kremlin has already decided to hike public sector wages, which affects about half the population directly and indirectly.
Still, despite the US attempt to slap new sanctions on it May (as yet unconfirmed) May was all about economics. The macro statistics for May were strong, driven by a 0.7% y/y increase in retail trade, which has been decline for two years, and a 5.6% y/y jump in industrial production coupled with a 3.8% y/y rise in construction.
The continuing recovery in retail (0.7% m/m) and corporate lending will provide support to growth going forward. The watch area over the coming months is forex market volatility and its possible implications: it could give a short-term boost to consumption.
May consumption-related statistics exceed expectations. Nominal salary growth was strong at 7.9% y/y in May and it was substantially upgraded for April – from the initial figure of 6.7% y/y to 8.0% y/y. The slow inflation rate, which has remained at 4.1% y/y in recent months (April-May), has translated into fast real salary growth – which has remained above 3.0% for the past three months and is combined with a lower-than-expected unemployment rate of 5.2% y/y in May (versus 5.3% a month earlier). All in all, the retail statistics confirm the CBR concerns expressed in the recent policy rate release: that tight labor market supply creates a risk of the economy overheating.
Another positive development is that recovery took place not only in retail, but also in the real sector, while there it looks less sustainable. Industrial production grew by 5.6% y/y in May and it is up 1.7% y/y in 5M17 -- attributed to the unusually cold weather effect playing in favor of strong growth. That said, the construction sector has also delivered a strong pick-up in activity in May, when volumes rose 3.8% y/y, and we attribute this favorable trend to budget stimulus: in May, expenditures jumped 13% y/y versus 3% y/y growth in 4M17.
Lending activity continued to improve in May, but is still anemic. concern over a very strong recovery in consumption-related indicators is reinforced by the continuing recovery in retail lending. Retail loans grew 0.7% m/m in May, accelerating to 4.6% y/y from 4.1% y/y in April. In the corporate segment, loan book growth, while being more modest, also improved to -1.8% y/y (adjusted for forex revaluation) versus the -4.1% y/y reported for April.
Finally, there is some uncertainty over the coming months as both oil prices and the ruble have been very volatile.
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