Russia’s GDP fell by 0.7% in annual terms in the first nine months of 2016, according to the Ministry for Economic Development.
The result was a disappointment as a few good months of growing manufacturing in the summer had some analysts pointing towards a more optimistic scenario with a contraction of only 0.2% for this year.
However, manufacturing is closely tied to state spending and the cash-strapped government cut spending in July, which was immediately apparent in the industrial production numbers.
“On an annual basis, according to the Russian Ministry of Economic Development, in September of 2016 GDP fell by 0.7% in the first nine months - by 0.7% year on year,” the ministry said in a statement. Seasonally adjusted Russian GDP fell by 0.2% in September with positive dynamics of seasonally adjusted growth seen in mining and retail, it added.
“The negative GDP dynamic in September did not come as a surprise, as earlier published industrial production data supported this trend – after a 0.7% y/y increase in August, industrial production fell 0.8% y/y in September, dragging down the GDP figures,” Gazprombank said in a note.
However, some analysts are confident that the worse-than-expected result is a one-off associated with the summer slowdown. A very large part of state spending comes in the last three months of the year and this should feed through to above trend industrial production as winter closes in and better growth figures.
“The expected seasonal acceleration of budget spending growth to 15% y/y in 4Q16 from 1% y/y in 9M16 will at least hamper further weakness in the economic dynamic,” Gazprombank added.
On the downside, the austerity the government is intending to impose in 2017 by capping spending at RUB15.8 trillion ($250bn) will hurt growth. The Central Bank of Russia’s hawkish stance in its battle to reduce inflation will also be a drag on growth, so the outlook for 2017 is at best a muddle through. While economists think these policies are prudent, they also say they will hurt growth in the medium term.
“In the long term, this is a positive factor helping to limit budgetary risks and restrain inflation. However, in the medium term, this will maintain the fragility of GDP growth. We still believe that following the 0.7% y/y decline in 2016E, economic growth will be limited to +0.5% in 2017E,” Gazprombank said.
The result leaves Russia on course to meet the economy ministry’s “basic” forecast with a 0.6% contraction this year and 0.6% growth next year.