Russia: After substantial deterioration in Q4 economy, contraction is milder in Q1

Following a notable deterioration in the final quarter of 2015—when Russia’s economy registered the steepest contraction since 2009—GDP proved more resilience in the first quarter this year, despite a renewed fall in oil prices at the beginning of the year and heightened volatility in financial markets. According to revised data, GDP decreased 1.2% on an annual basis in Q1 (in line with a preliminary estimate), which came in above the 3.8% contraction registered in Q4 2015 and the 2.0% decrease the markets had expected.

A detailed breakdown of data by economic sectors showed that agriculture continued to expand in Q1, yet the expansion was the softest since Q4 2014 (Q1: +0.7% year-on-year; Q4: +5.6% yoy). A silver lining was observed in mining and quarrying growth, which rose from 1.4% in Q4 to 2.1% in Q1. The manufacturing sector continued to contract in Q1, although at a slower pace than in Q4 (Q1: -4.0% yoy; Q4: -6.2% yoy). Meanwhile, most of Russia’s services continued to perform poorly in Q1, with the exception of financial intermediation, which rebounded over the previous quarter (Q1: +1.5% yoy; Q4: -6.0% yoy), and real estate activity, which continued to grow.

Following the better-than-expected result in Q1, the government remains more optimistic regarding the country’s outlook. Recently, Economic Development Minister Alexei Ulyukayev stated that the lowest point of the recession has passed and the economy is recovering rapidly. The baseline forecasts of the Ministry of Economic Development projects the economy to contract 0.3% in 2016.

Meanwhile, the Central Bank expects the economy to contract at a rate of between 0.3% and 0.7% in 2016 (previous estimate: minus 1.3% and minus 1.5%). For 2017, the Bank expects economic growth rising to within a range of 1.1% and 1.4% (previous estimate: minus 0.5% and plus 0.5%).

Following the economy’s worst economic collapse in 2015, the analysts surveyed by FocusEconomics expect the Russian economy to continue contracting in 2016, although at a more moderate pace. FocusEconomics Consensus Forecast panelists project Russia’s GDP to fall 1.4% in 2016, which is down 0.3 percentage points from last month’s forecast. Panelists expect the economy to expand 1.2% in 2017.