Weak demand in 2016 puts Russia's 2017 recovery in question

Weak demand in 2016 puts Russia's 2017 recovery in question
Russia's December retail trade performance was much worse than consensus expectations of 3.7% y/y decline.
By bne IntelliNews January 26, 2017

Russia's retail trade turnover in December contracted by 5.9% year-on-year, deepening the 4.1% y/y decline seen in November, the Rosstat state statistics agency reported. December's retail trade performance was markedly worse than consensus expectation of 3.7% y/y decline.

On the backdrop of strong upturn on the supply side towards the end of 2016, with industrial output figures exceeding expectations, persistently weak consumer demand remains the main drag on the expected recovery in Russia in 2017.

For 2016 overall, retail trade contracted by 5.2% y/y versus the 10% y/y slump seen in 2015, despite the recovery of real wages to 0.4% y/y growth after a 9% y/y drop in 2015.

"Weak consumption dynamic most likely reflects a reaction to hawkish signals about budgetary and monetary policy (making households less inclined to consume), as well as the factor of a strong ruble, rather than fundamental weakness in income," Gazprombank wrote on January 26.

Alfa Bank sees December's retail trade figures as "deeply disappointing" and notes that demand continues to be weak despite stable strong growth in nominal salaries (7.9% y/y in December), real salaries (2.4% y/y in December) and better-than-expected figure for unemployment (down to 5.3% in December).

"This confirms our explanation that an increase in poverty is causing a divergence between relatively positive income and unemployment figures and consumption patterns," Alfa said.

At the same time, Gazprombank is "not inclined to consider the December result as unambiguously negative", but still does not expect any improvement in household spending soon.

The bank sees consumer dynamics remaining weak, at least in the first half of 2017, while expecting GDP growth to be limited to 0.5% in 2017, much lower than the recent Ministry of Economic Development unofficial forecast of 1.5-2% growth.

Alfa Bank sees December's data as a signal that stable recovery trajectory is not yet reached, reminding that industrial output growth in the end of 2016 was largely attributed to budget spending, which the government has recently pledged to keep in check in 2017.

The bank also sees risks to the 1.5% GDP growth forecast, especially given weak crediting statistics in the end of 2016.