Russian recovery still bumpy in May, consumption lags behind

Russian recovery still bumpy in May, consumption lags behind
By bne IntelliNews June 21, 2016

Russian real incomes and retail turnover fell in May. That is bad news for consumers, but good news for the Central Bank of Russia (CBR).

Russia's economy has been showing signs of life in the first quarter of this year as real income growth briefly went back on the back of falling inflation and improving confidence. However, May showed the base sectors of Russian economy were sluggish and displayed mixed dynamics in May. Hopes for economic growth gathering some momentum failed to appear. With retail trade and construction disappointed in the context of revived industrial and manufacturing output, according to the data by Rosstat released on June 20.

Manufacturers seems a lot more confident about Russia;s future growth than consumers, but that is due to persistent inflation. The rapid fall in consumer price inflation (CPI) that peaked in December 2015 at 12.9% has stalled and has been stuck at 7.3% for the last three months. Nominal wages have been rising but not by enough to offset inflation: in April and May nominal wages rose by 6.1% and 6.2% respectively. The upshot is consumers are still being slowly squeezed.

That means real wages and real disposable wages both fell in May, down by 1% and 5.7% respectively, although the rate of the fall was less than a month earlier (-1.1% and -7.1%).

And Russian consumers are extremely sensitive to inflation and the real wage dynamics, so the pressure was immediately apparent in retail sales. Having recovered from a catastrophic collapse in December, the fall in retail turnover accelerated again in May, declining by 6.1% y/y in May vs -4.7% y/y in April – worse than the Bloomberg consensus forecast for the month of -4.8% y/y.

Uralsib Capital commented on June 21 that the long-term and lingering nature of the ongoing crisis has forced many consumers to change their consumption habits, which will put consumer demand on slow recovery trajectory.

Outlook for 2H16 still bright

While consumers are still feeling gloomy thanks to the slow progress in Russia's grinding battle against inflation, manufacturers are more optimistic and holding up hopes that the economy will return to real growth in the second half of this year.

Positive first-quarter GDP and income figures, as well as a rebound in industrial output in May and April reinforced the widely held belief that Russia will transition from recession to slight growth later this year – hopes that just received a fillip from the CBR, after it cut overnight rates to 10.5% earlier this month.

The positive trends on the output side where confirmed with 0.7% y/y increase in industry overall, 0.6% y/y gain in transportation, and the usual frontrunner agriculture posted 2.6% y/y growth in May.

At the same time, the overall supply-side picture was spoiled by construction, which posted significant decline for the second month in a row, dropping 9% y/y in May after 5.9% y/y decline in April, the worst decline since October 2015.

Moderate positive income signals

Meanwhile, income dynamics could support consumption growth in the second half of 2016, with some positive signals showed in May. Real wages decline moderated to 1% decline y/y in May and 0.8% y/y decline in January-May.

Sberbank CIB expects real wages to return to growth by year-end supporting the y/y retail trade dynamics, the bank said on June 21.

The bank also notes that "household consumption has been healthier than retail sales", pointing to paid household services increasing in real terms by 0.2% in May and declining by only 0.8% over January-May.

Unemployment dynamics were also positive in May, with labour market remaining tight and unemployment rate going down from 5.9% a month before to 5.6%, the lowest since October.
Some of the decline, however, was attributed by Uralsib and BCS Equity to seasonal factors, such as increased seasonal employment in construction.

Rosstat reported an accelerated decline in real disposable income in May, falling by 11.5% m/m and 5.7% y/y, but Sberbank dismissed this data, arguing that they are "methodologically biased given that the State Statistics Service counts FX sales as revenues, while they should be booked as changes in net savings".

Interest rates could help turn the corner

"The economy appears to have bottomed in 2Q15 and remained at that level (after seasonal and calendar adjustments) last year," Sberbank CIB argues.

The bank added that "an upturn is possible on the back of the recovery in domestic consumer and investment demand, and key rate cuts could be the trigger for this if they continue in 2H16," referring to highly anticipated further monetary easing by the central bank.

Uralsib is cautious on the consumer demand, arguing that "despite some stabilization in the economic situation we believe that consumer demand will remain depressed and retail trade will remain under pressure even in the event of improvement to income". The bank still sees  real income contracting by 1% y/y and retail trade down by 4.2% y/y in 2016 overall.

Moderate and slow recovery of incomes, together with depressed demand will indeed help the central bank to reach inflation targets and create more space for interest rate cuts. 

BCS Equity too acknowledges the pressured demand sector, but also sees a bumpy road ahead for the output as well, reminding that investment remains chronically weak, highlighting many commercial real estate projects remaining on hold and falling construction material output.