Russia Country Report Jun18 - June, 2018

June 4, 2018

Russia’s economic recovery is going better than expected, driven by the higher than expected oil prices, which have averaged over $60 a barrel against the budget assumption of $44 for this year.

That is providing the state with windfall revenues it can use to channel into its RUB8 trillion spending plan to revive the economy and lift incomes. This is having multiple effects that will support growth. Consumption is higher than expected, incomes are rising back close to pre-2008 levels and tax hikes planned to raise new revenues have been less painful. However, none of this is expected to fuel a boom seen in the noughties. The recovery remains fragile.

After reporting slight recovery in industrial output in April, first-tier data of Russia Rosstat statistics agency showed improvements on the demand side as well, with retail trade increasing by 2.4% year-on-year in April, up from 2% growth seen in March.

Following bumpy macro data in the first quarter and disappointing output in March, "Russian industrial production showed some improvement, while the consumer side remained in good shape," Renaissance Capital commented on May 23.

Confirming the trend, the Ministry of Economic Development on May 23 estimated that GDP increased by 1.7% year-on-year in April, up from 1.4% in March and February and 1.1% seen in January.

In January-April overall, GDP growth is estimated at 1.3% y/y, flat as compared to 1.3% y/y preliminary estimate for the first quarter. Currently the government still expects 2.1% GDP growth for 2017, with the CBR forecasting 1.5-2% growth and Reuters analyst survey showing 1.7% GDP growth expectations.

Commenting on April base sector data VTB Capital on May 23 reiterated its previous argument that previous contraction in the value of construction works was temporary, as it reverted to growth in April (from -9.7% y/y in March).

"The second eye-catching print provided by the report was the visible acceleration in non-food retail sales, which we see as a reflection of the ruble weakness in early April that prompted households to front load big-ticket purchases in an attempt to get ahead of the exchange rate pass-through in non-food prices," VTB commented. Non-food retail sales picked up by 2.7% y/y in the reporting month.

On the labour market side, Rosstat's report "confirmed the well established trends in nominal wages," such as double-digit growth due to indexations in the public sector and an increase in the minimum monthly wage.

Real wage growth for March was revised upwards (from 6.5% y/y to 8.7% y/y in real terms), and the estimate for April stood at 7.8% y/y. Real disposable income grew steadily for the third month in the row, with growth accelerating from 4.5% y/y in March to 5.7% y/y in April currently. The real disposable income has been negative for several year prior to this year’s recovery.

"However, we believe that this uptick is mainly driven by one-off events and will taper off later into the year, coming closer to 3% y/y," VTB Capital suggests.

Renaissance Capital noted that consumer demand "remains in good shape" and forecasts that the indicator could be up by almost 4% in 2018/2019, with a rise in discretionary spending.

"We’ll see how successful the new government could be in achieving the goal of improving potential growth prospects without putting the major priorities of low inflation, fiscal discipline and reserve accumulation under threat," the analysts comment on the main downside risks for short-term growth outlook.

In the meantime the "sound inflation picture with annual inflation still running at 2.4% in mid-May, implies good timing for some rate cuts," according to RenCap, which is counter-balanced with better consumer demand prospects as well as recent geopolitical tensions and a rise in the Russian risk premium.

Should any interest rate cuts be expected, they are more likely to happen in June, July or September, and not in the fourth quarter or 2019, the analysts believe, and maintain the view that the Central Bank of Russia might cut the rate by 25bp in June and arrive at a 6.75% terminal rate in the third quarter.

To remind, the CBR's board on April 27 resolved to keep the key interest rate unchanged at 7.25%, pausing the monetary easing cycle after the volatility that followed the latest round of US sanctions.

The International Monetary Fund (IMF) keeps its forecast for Russian GDP growth this year steady at 1.7% despite increased pressure from Western sanctions, the IMF's mission chief to Russia Ernesto Ramirez Rigo told the press in May 23.

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