Russia Country Report Nov17 - November, 2017

November 3, 2017

Russian GDP grew in April-June by 2.5% y/y. According to fresh GDP figures, however, much of the growth came from a build-up in inventories, suggesting that growth is still on a rather fragile base.

Domestic demand also recovered as household consumption grew by 3% y/y and fixed investment rose by 6%. The growth in demand was, however, largely directed to imports rather than domestic production, as the volume of imports grew by over 20%. Growth in exports, which supports domestic production, slowed considerably from the first quarter. Both the Central Bank of Russia and the economy ministry estimate that GDP growth slowed to around 2% y/y in 3Q17.

The International Monetary Fund (IMF) improved Russia's GDP growth outlook to 1.8% in 2017 and 1.6% in 2018, up from 1.4% for both years previously, according to the latest World Economic Outlook published on October 10.  The IMF joins a recent spate of upward revisions for Russia’s economic growth and attributed it to stronger global financial stability, slower inflation, output gains, and ruble strengthening.  However, the IMF remains more cautious than the Russian Ministry of Economic Development, which recently improved its forecast for growth to 2% GDP.  The fund still sees risks to the outlook from oil price volatility, the ongoing capital outflow, and deepening of the sanctions against Russia's largest oil and gas companies and banks.  

Inflationary expectations of Russians for the next 12 months remained at all-time low increasing only by 10bp to 9.6% in September, according to the monthly poll held by the Central Bank of Russia (CBR).  Inflationary expectations are in the focus of the cautious regulator that recently has resumed the monetary easing cycle, but still wants to see expectations converge to the actual inflation it succeeded in curbing to little over 3%. Respondents mention less the significant growth of prices for public utility services, for fruit and vegetables, for gasoline, and food basket essentials such as sugar, salt, bread, chicken eggs, cereals, and noodles, according to the survey.  However, the number of people who actually believe that current inflation is close to 4% remains low, with the majority of respondents "still not sure of it," which points to persisting risks of inflationary expectations keeping high, the CBR said.

On the consumption side, the recovery seemed to strengthen, with retail sales rising 3 % y-o-y in September. Retail sales growth accelerated sharply, even with meagre income development. In other words, most consumption growth was funded by credit or savings. Real wages were up less than 3 % and real incomes continued to contract slightly despite historically low inflation.

On the production side, third-quarter growth was supported by agriculture, which saw output increase by nearly 9 % y-o-y in September. The high growth partly reflects a later harvest than in 2016, but the overall harvest this year is expected to be even larger than last year's bumper yield.

The extractive sector and related transport, which led growth of the economy in the first half, lost steam in September as well as in the entire third quarter. With the decline in oil production in September, total mineral extraction remained unchanged from a year earlier. Growth in the transport sector slowed significantly as pipeline transmission volumes plateaued. Manufacturing output increased by 1 % y-o-y, but that increase was partly supported by an output spike in the highly volatile transport equipment branch.

Rosstat's revision of its earlier published growth figures meant that the outlook for the construction sector darkened considerably in September. The new numbers suggest that construction only achieved faint positive growth very recently. For the first nine months of the year, construction activity fell by 2 % y-o-y.

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