Russia: Economic contraction in Q1 is less severe than previously feared
May 16, 2016
The Russian economy was more resilient than expected in the first quarter, despite a renewed fall in oil prices at the beginning of the year and heightened volatility in financial markets. According to a preliminary estimate released by the Federal Statistics Service (Rosstat) on 16 May, GDP decreased 1.2% on an annual basis in Q1, which overshot the 3.8% contraction registered in Q4 2015. The result fared better than the 2.0% contraction the markets had expected and the Ministry of Economic Development’s estimate, which had predicted a 1.4% decrease.
Although Rosstat did not release a detailed breakdown of data, the majority of analysts agree that the main drag on growth continued to be private consumption. Household consumption remained weak as a result of deteriorating real wages, high unemployment and less positive lending conditions. However, since inflation began to fall gradually at the beginning of the year and the Russian ruble stabilized toward the end of the first quarter, dynamics in real wages improved somewhat in Q1. By the end of Q1, real wages declined only 3.0% year-on-year, which was a notable improvement over the nearly 10.0% decrease tallied at the end of 2015. Moreover, gross fixed investment continued to decline in the first quarter, although the contraction was likely less severe than in Q4 2015 as government provided additional support to state-owned firms. Another factor that analysts believe aided economic activity in Q1 was the fact that the Central Bank maintained the monetary policy rate at 11.0%, buttressing ailing banks to attract more deposits in order to restore credit flows to businesses. Moreover, after the ruble plunged to an all-time low in January, it has stabilized as crude oil prices have rebounded since February. The Central Bank has also credited the ruble’s free-float regime for helping offset external shocks.
Due to the less negative economic news, the Economic Development Ministry expects the economy to contract only 0.2% this year. Russia’s central Bank is more pessimistic and expects the economy to contract between 1.3% and 1.5% this year.
Author: Ricardo Aceves, Senior Economist