Russian industrial production falls only 0.5 in July, grows in seasonally adjusted terms, inflation continues to ease

Russian industrial production falls only 0.5 in July, grows in seasonally adjusted terms, inflation continues to ease
Russia surprised with an expansion in industrial production in July, defying expectations of a sharp contraction. Inflation is also still falling, but remains elevated. / bne IntelliNews
By bne IntelliNews August 25, 2022

Russia’s economy continues to do better than expected with industrial production falling only 0.5% y/y in July as after six months of war business adapts to the new conditions and put in a small gain in seasonally adjusted terms, Rosstat reported on August 24. Inflation also continues to fall thanks to traditional summer deflation

Industrial production's slight decrease was far less than the forecast contraction of -2.3% from analysts and since the beginning of the year industrial output is up 1% compared to the same period a year earlier.

Seasonally adjusted and in monthly comparison, industrial production increased for the first time since the beginning of the year by 1.2% versus June. In June, industrial production fell by 2.4%.

This stands in stark contrast to the controversial Yale report  that claims Russia’s economy has come to stand still.

“It is noteworthy that Rosstat improved its estimate of industrial production growth in 2021 from 5.3% to 6.4%, and the high base effect forced it to worsen its assessment of dynamics in the first half of 2022: growth by 1.3% instead of 2.0% due to "pre-war" January and February,” The Bell reports.

The surprising industrial production report comes on top of good results from S&P manufacturing and services PMI indices, which both showed accelerating expansion in June and July and the panellist in the survey are increasingly optimistic about the prospects for the full year. The services PMI in particular expanded by 54.7%, the fastest pace in a year.

Amongst the sectors the extractive industries and oil refining put in noticeable gains as metals are largely not sanctioned and oil exports have managed to find new markets to take up nearly all the slack. There was also a rebound in pharmaceuticals, microelectronics and the textile industry, due to the outflow of foreign competitors, The Bell reports.

Surprisingly, even the auto industry rebounded, showing a decline in dollar terms of 58% after 66% in May, nevertheless the volume of cars being produced and sold remains at about a tenth of pre-war levels. In mid-August, AvtoVaz  announced the restoration of a five-day working week, and on the eve of the return to the Vesta conveyor with airbags.

“The figures suggest that the fall in Russia's GDP will not be as deep as it seemed in March-April. In the first half of the year, the economy contracted by 4%, the Central Bank predicts 4-6% for the year,” The Bell reports. Alexander Isakov, an economist at Bloomberg Economics for Russia, says the data confirms the forecast for a 3.5% fall in GDP – one of the mildest predictions from all observers that range between 4% and 6% contraction.

At the same time Rosstat also reported that deflation continues that will fuel growing fears that Russia might get trapped in a deflationary spiral.

Deflation takes hold in Russia. After runaway inflation this spring, the Russian economy is lurching toward the opposite extreme. For the second month running, the country has recorded deflation. Prices are falling due to a strong ruble and a sharp decline in demand: Russians are apparently anxious about another crisis and are starting to save. For the economy, falling prices are an alarming sign, but after the traditional summer depression of food prices passes in the autumn, others argue that inflation will rise again.

The populations expectation for inflation is for it to fall from the current 14.6% to 12%. (chart) There was no change in the population’s expectations, except for the very poorest groups that believe it might increase in the autumn.

Russians’ median inflationary expectations for the next 12 months increased by 1.2 percentage points to 12% in August getting close to the figures of June–August 2021, the central bank said on August 24. According to the central bank, the expectations increased only in the group of respondents without savings, with the lowest income respondents' expectations rising most. The expectations of respondents with savings decreased for a fifth month in a row. The short-term disinflation risks for the economy increased, while in the medium term, pro-inflationary risks prevail, the authority said.  

By August 22, prices were down 0.15% after 0.13% deflation in the week to August 15 and 0.08% in the week to August 8. Taking into account the fact that in June and July there was also deflation (0.35% and 0.39% respectively), deflation for all three summer months is practically guaranteed.