Russia Economic Outlook
GDP fell at a sharper annual pace in Q4, as suggested by full-year data, which showed a 2.1% contraction in 2022. Turning to Q1, economic conditions remain muted, although activity continues to exhibit resilience to the war-induced shock. Industrial output and retail sales shrank again in January compared to December, as contracting mining activity in the wake of fresh EU sanctions hammered the energy sector. Meanwhile, household spending continued to weaken due to elevated inflation and high interest rates. That said, PMI readings pointed to healthy expansions in both the manufacturing and services sectors in February. Less positively, Russia’s budget deficit soared to USD 34.2 billion in January–February on eroded oil and gas revenues. Meanwhile, the war in Ukraine rages on, with direct and indirect war-related costs set to weigh on the Russian economy in Q1 and beyond.
Inflation ticked down to 11.8% in January (December: 11.9%), marking an 11-month low. That said, inflation expectations rose in February, signaling a potential reversal in the downward trend. Nevertheless, inflation is seen cooling notably by year-end due to a tough base effect, high interest rates and sluggish domestic demand. Risks are skewed to the upside, however.