Russia Economic Forecast

GDP jumped 4.9% year on year in Q2, marking the first expansion since Q1 2022. Industrial output rebounded strongly in Q2, thanks to recovering manufacturing activity, while a tight labor market and higher wage growth boosted retail sales. Moreover, a loose monetary policy stance, low inflation and elevated government spending likely boosted domestic demand. Upbeat growth momentum seems to have carried over into Q3. In July, economic activity climbed 5.0% yoy, supported by sustained growth in the industrial and retail sectors. Meanwhile, PMI data suggests private sector activity continued to expand in July, albeit at a slower rate than the Q2 average. Less positively, a resurgence in inflationary pressure and a rapid depreciation of the ruble forced the Central Bank to markedly tighten monetary conditions in August. This, coupled with falling oil output, bodes ill for economic activity.

Inflation rose to a five-month high of 4.3% in July (June: 3.2%). This was due to faster price growth for both food and non-food goods, which more than offset cooling services inflation. Inflation is forecast to rise further by year-end, partly on a weaker ruble, although aggressive monetary policy tightening by the Central Bank of Russia (CBR) should keep it in check.