It’s back to school in Russia and time to break out the mini-suits for the boys and the white pom-poms to hold the girls’ hair back, but the seasonal spike in shopping September 1 brings in Russia was subdued this year as the Watcom shopping index continues to fall further behind previous years.

“Shopping Index during back-to-school season showed the worst result over the last four years,” says Sergei Skorokhodov, Watcom’s CEO. “The reason is [the] rational model of purchasing. People are looking for deals, sales as well as e-commerce, thus saving on kids.”

The index uses security cameras in Moscow’s leading shopping malls to measure foot traffic and is an almost real time measure of retail activity in the richest city in the country. This year the index has fallen significantly behind previous years, despite a return to positive retail turnover growth and the recovery of real and real disposable incomes after several years of contraction.

The trend continued in the last weeks of the summer with the index falling by 11% y/y to the low to mid 400s – its lowest level since the inception of the index in 2014. In previous years the index showed a dramatic spike as the September 1 deadline approached, and the index is usually around the 500 mark.

Income recovery remains fickle but had been in positive territory all year. However, the real incomes of Russians in August decreased for the first time since early 2018, falling by 0.7% in August m/m compared to July, Rosstat reported on September 20. In annual terms incomes were up 0.9% over August 2017, slowing considerably from previous months earlier this year. But this slowdown in income growth is not enough by itself to account for the fall in retail turnover and it is more than offset by the fast expansion in retail borrowing.

Russian retail loan book growth accelerated in August to 20.7% y/y, from 19.7% in July. Further growth is likely to be supported by expectations of an increase in the interest rate on the back of the CBR’s more hawkish comments in June, seasonal demand and the tighter regulations on consumer loans. Indeed consumer borrowing is growing so fast that the Central Bank of Russia (CBR) is once again worried about a consumer loan bubble appearing and will introduce tighter restrictions on consumer loans in September to cool the business off.

The main explanation of the slowdown in the Watcom index is the ongoing migration of Russia’s retail business to the internet. E-commerce is currently expanding by about 20% per year, which is ten times the pace of the real economy.

This migration is also showing up in the PMI industrial activity index, where the manufacturing PMI index was 48.9 in August, or just below the no-change 50 mark. However, the services PMI continues to expand robustly and rose to a three month high of 53.3 the same month. Russia is increasingly becoming a services economy and the population’s shopping habits are changing as they order more and more online.