Comprehensive GDP data revealed that the recovery lost steam in the fourth quarter of last year, with growth weighed on by inventories as well as slowing fixed investment. Recent indicators, however, suggest that activity likely bounced back in the first quarter of 2018 and that overall the
recovery remains on track if lackluster. Consumer confidence improved in Q1 and the unemployment rate inched down in February, boding well for household spending in the quarter. Positive signs emerged from the external sector as well with exports growth hitting a 10-month high in January and the Ural oil price jumping in March, which should support export revenues. On the political front, as widely expected, President Vladimir Putin won the 18 March election, securing over 75% of the
votes. More recently, on 6 April, the United States unveiled new sanctions against several high-profile Russian businessmen and their affiliated companies. The measures freeze their U.S. assets and ban Americans from conducting business with them. The sanctions caused turmoil in
Russian financial markets, with the main stock index diving and the ruble depreciating over 4.0% on 9 April.
Rising oil prices, a healthy labor market and improved consumer confidence should cause growth to gather steam this year. However, limited oil output and structural rigidities will hamper activity, while the impact of the fresh sanctions is still uncertain. FocusEconomics Consensus Forecast
panelists see GDP expanding 1.8% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen stable at 1.8%.
Inflation edged up from February’s historic low of 2.2% to 2.4% in March. Amid subdued price pressures, the Central Bank cut the key interest rate from 7.50% to 7.25% on 23 March as expected. Inflation is seen ending 2018 at 3.7% and 2019 at 4.0%.
REAL SECTOR | Growth slides in Q4 A comprehensive estimate of national accounts data released by Rosstat on 3 April confirmed that the Russian economy rebounded last year, with GDP rising 1.5%, unchanged from the preliminary estimate released on 2 February (2016: -0.2%). In the same release, Rosstat unveiled GDP data for Q4 2017, as well as revisions to Q1–Q3 2017 national accounts data. The new figures showed that growth slowed notably in the fourth quarter, with GDP expanding 0.9% annually, a significant slowdown from the third quarter’s revised 2.2%
expansion (previously reported: +1.8% year-on-year). Inventories subtracted from growth in the fourth quarter, primarily driving the slowdown in GDP growth. In addition, fixed investment lost steam, increasing 3.4% annually in Q4, down from Q3’s 4.0% rise. The economy is still weathering
the effects of low oil prices, limited oil output and economic sanctions, which has caused the recovery to be sluggish so far. However, private consumption growth inched up from 4.2% in Q3 to 4.3% in Q4, a resilient reading likely supported by low inflation in the quarter. Government consumption was stable at Q3’s 0.4% expansion in Q4.
Exports gained momentum in the fourth quarter, rising 5.2% over the same period of the previous year (Q3: +4.7% year-on-year). The Ural oil price rose throughout the quarter, while healthy global growth is also helping shore up overseas sales. Meanwhile, import growth decelerated in the fourth quarter to 15.4%, below the third quarter’s buoyant 17.1% rise.
Looking ahead, the recovery is expected to modestly gain steam this year on the back of monetary policy easing, higher oil prices and healthy household consumption. However, the production cut deal with OPEC, along with fiscal tightening, will keep oil output limited.
FocusEconomics Consensus Forecast panelists see GDP expanding at 1.8% in 2018, which is unchanged from last month’s forecast. Panelists expect the economy to expand 1.8% in 2019.
REAL SECTOR | Industrial production loses steam in February Industrial activity decelerated in February, according to the Federal State Statistics Service (Rosstat). Industrial output grew 1.5% year-on-year, which was below January’s 2.9% rise. The result was driven by slower output growth
in the manufacturing and mining sectors.
The trend, however, improved in February and annual average growth came in at 1.5%, above January’s 0.9%. A month-on-month comparison revealed that industrial production lost ground as output fell 1.3% over the previous month in February (January: +2.4% month-on-month).
Next year, the panel of analysts expects industrial output to expand 1.6%, which is down 0.1 percentage points from last month’s forecast. For 2019, the panel expects industrial production to increase 1.9%.
REAL SECTOR | Manufacturing sector remains lackluster; services sector loses steam in March
Business conditions in Russia’s manufacturing sector improved modestly in March. The manufacturing Purchasing Managers’ Index (PMI), produced by IHS Markit, rose from 50.2 in February, the worst result since July 2016, to 50.6. As a result, the PMI lies only slightly above the 50-threshold that separates expansion from contraction in business activity in the sector. For
Q1 as a whole, the manufacturing PMI recorded the worst average since Q3 2016 signaling subdued activity in Russia’s manufacturing sector.
According to IHS Markit, growth in output expanded healthy in March, although new orders lost steam pointing to fragile demand. Spare capacity caused backlogs in work to fall and firms also shed jobs, albeit only modestly. Higher prices for raw materials caused cost burdens to rise at the sharpest
race since October, although inflationary pressures overall remained modest in the context of historical data. Business confidence also dipped in March. Meanwhile, activity in the services sector lost pace in March. The Services Business Activity Index produced by IHS Markit fell from 56.5 in February to 53.7, the lowest reading since July 2017. Despite the fall, the indicator remains firmly in expansionary territory.
FocusEconomics panelists project that fixed investment will grow 3.3% in 2018, which is up 0.6 percentage points from last month’s forecast. In 2019, the panel sees fixed investment rising 2.8%.
OUTLOOK | Consumer confidence rises in Q1
The consumer confidence indicator published by the Federal Statistics Service (Rosstat) improved in Q1 2018, rising to the highest reading since Q3 2014. The consumer confidence indicator rose from Q4 2017’s minus 11 points to minus 8 points. Despite the rise, the index remains firmly entrenched below the 0-threshold, which indicates that pessimists outnumber optimists.
According to the survey, the improvement was broad-based across the components of the index. Households were more optimistic about the future economic situation in Russia and assessed the current situation less negatively than in the previous quarter. In addition, households’ assessments
of their current and future personal financial situation improved in Q1.
FocusEconomics Consensus Forecast panelists expect private consumption to expand 3.3% in 2018, which is up 0.3 percentage points from last month’s projection. For 2019, panelists expect private consumption to increase 2.6%.
MONETARY SECTOR | Inflation rises from historic low in March In March, consumer prices rose 0.3% from the previous month, a notch above the 0.2% month-on-month increase observed in February. According to Rosstat, prices for food recorded the largest rise in March, driving the index’s
reading. Inflation rose from February’s historic low of 2.2% to 2.4% in March. Despite
the rise, price pressures remain subdued and inflation lies far below the Central Bank’s target of 4.0%. Annual average inflation also declined from 3.3% in February to 3.1% in March, a historical low. Panelists see inflation ending 2018 at 3.7%, which is down 0.3 percentage points from last month’s forecast. For 2019, participants expect inflation to end the year at 4.0%.
MONETARY SECTOR | Central Bank cuts key interest rate to 7.25% in March At its 23 March meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) decided to cut the key interest rate by 25 basis points to 7.25%, a move widely expected by market analysts. The decision followed a same-sized cut in February and marks the lowest policy rate since
Low inflationary pressures have given the Bank space to pursue an easing cycle as it aims to transition to neutral monetary policy. In its accompanying statement, the CBR commented that inflationary expectations are continuing to fall, and that price pressures remain low; they are, however, low partly due to a favorable base effect. The Bank expects inflation to return to its target
of 4.0% in the second half of 2018 as this base effect from high food prices last year fades. Notably, it made no changes to its growth projections for the Russian economy this month despite higher oil prices, citing ongoing structural issues and lower sensitivity to oil price fluctuations as the reasons
for the unchanged prospects. Looking forward, the Bank signaled that more cuts are in the pipeline, as it stated that it plans to complete the transition to neutral monetary policy by the end of the year. A key interest rate of between 6–7% is considered as roughly neutral. The Bank, however, highlighted one new upside risk to its inflation outlook: A tight labor market could put upward pressure on prices
through higher wages. The next monetary policy meeting is scheduled for 27 April 2018.
FocusEconomics panelists see the key interest rate ending 2018 at 6.56%. In 2019, panelists see the Central Bank lowering the monetary policy rate further, with a Consensus Forecast of 6.15%.
EXTERNAL SECTOR | Exports growth hits 10-month high in January Merchandise exports totaled USD 33.4 billion in January, which represented a robust 31.3% increase compared with the USD 25.4 billion observed in the same month of 2017. The expansion was above December’s 18.7% increase
and marked the fastest growth since March 2017. Supportive global conditions and higher commodity prices have led to a surge in Russian exports in recent months.
Imports increased 20.4% annually in January, slightly below December’s 23.4% increase and came in at USD 16.4 billion. The trade surplus came in at USD 17.0 billion, which was notably larger than the USD 11.8 billion surplus seen in January 2017.
The external sector has recovered notably over the past year and the improvement is more clearly seen when examining the trailing 12-month sum of the trade balance. In January, the trailing 12-month sum came in at a surplus of USD 120.2 billion, above December’s USD 115.0 billion and the
best reading since March 2016. The analysts we surveyed this month project Russia’s exports to reach USD 390 billion in 2018. Going forward, panelists expect exports to reach USD 404
billion in 2019.
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