GDP growth accelerates in May … According to estimates by the Economy Ministry based on data from RosStat, in May the growth in Russia’s GDP accelerated to 5.4% year on year from 3.4% y/y in April.

That was the second consecutive month of expansion following 12 months of continuous y/y declines in gross economic output. In seasonally adjusted terms, the Economy Ministry put the growth rate in May at 1.4% y/y after 0.1% in April.

 … led by the state sector, banks and real estate. An analysis of changes in the shares of main sectors in the structure of GDP, based on the latest data from RosStat, shows that between 1Q22 and 1Q23 the biggest rises in shares in GDP were recorded in the state sector, transportation, financial sector and in real estate. At the same time, the sharpest declines in shares were seen in the extraction sector (including oil and gas), manufacturing industry, collection of net taxes and retail trade.

Base effects are strongest in manufacturing, retail sales and construction. While RosStat data on GDP is quarterly and therefore comes with large delays, monthly statistics show that at the start of 2Q23, there has been a major reversal in growth dynamics among key industries. This was expected and primarily led by a big shift in the base factor. The latest RosStat monthly report for May 2023 identified three main drivers for this change in the growth trend: these are manufacturing industry, retail trade and construction. This is not surprising given that these three sectors posted the steepest declines in output one year ago, in April-May 2022 when the full effect of Western sanctions started to filter through into a broader economy.

Year-on-year recovery in manufacturing pushed IP up by 7.1% in May. According to RosStat, in May 2023 industrial production in Russia rose by a massive 7.1% y/y. While the extractive industry posted a moderate growth of 1.9% y/y, the manufacturing sector came out as the growth leader with a rate of 12.8% y/y. Utilities have seen a decline in output by 1.1% y/y – mostly due to warmer weather in May of the current year. Among major segments of manufacturing the biggest growth was seen in the automotive industry, which posted a rise in output by 11 times y/y and 1.6 times month on month.

 Construction is supported by public funding of investment projects. Among other sectors of the “real economy,” a significant increase in output in May was also recorded in construction volumes (13.5% y/y vs 5.7% in April). The residential sector posted a big reverse, with volumes up by 4.5% y/y after a decline of 14.3% y/y in April. Agricultural output somewhat slowed to 2.9% y/y in May from a growth rate of 3.2% seen one month earlier.

The low base also explains the fast recovery in the consumer sector: in May, volumes of retail trade jumped by 9.3% y/y from 7.8% in April and -4.8% y/y in March 2023. Volumes of paid services to the population rose by 5.2% y/y in May (4.3% in April), while in April real wages increased by 10.4% y/y, which is the highest growth rate since early 2018. The unemployment rate hit a new post-Soviet record low of 3.2% (in April it stood at 3.3%).

Acceleration in wage growth and falling unemployment … Overall, while the headline data gives a very positive picture of a rapid economic recovery in Russia, it is important not to overestimate the importance of that, since to a large extent the good figures are a reflection of big declines in output seen one year ago. However, two macro trends should be viewed as a reason for concern: these are the acceleration in real wage growth and a continued decline in the unemployment rate. These tendencies together show that structural problems in the Russian economy are getting deeper and more acute – such problems as a lack of labour due to falls in migration inflows and poor demographics. That, in turn, puts rising pressure on wages – a factor that potentially could become one of the main drivers for inflation.

… are a matter of concern in the long term. Potentially, these structural problems could be exacerbated by the risk that stems from the attempts by the government to bring its finances back into balance. Such moves would lead to the slashing of non-critical spending items – such as funding various investment and construction projects. Such efforts would inevitably translate into a slowdown in the economy – a scenario that could start to evolve already by the start of 2024.

Public social spending will continue to support the economy – at least until the end of the 2024 election cycle. However, there is one important factor that could halt the slide of the economy into recession – this is the government’s expanded social spending. In their most recent communications on economic policy, President Putin and his Cabinet officials said that in their growth policies, they want to prioritise support for domestic demand. This means that the government will continue to boost its spending on public wages and pensions: it already announced that in October 2023 the salaries of the military and security personnel will be increased, followed by a similar move in January 2024 for the wages of other public employees. As the latest data suggests, real wages have already seen a massive rise of over 10% y/y in April and the trend will likely continue in 2H23 and 1Q24, especially if one takes into account the start of a new political cycle in Russia (next presidential elections in Russia should take place in March 2024).