Russia: Economy continues to show signs of emerging from downturn
December 30, 2016
Russia’s economic downturn continued to slow in the third quarter, indicating that the economy’s return to growth is in sight. Comprehensive data showed that GDP contracted 0.4% annually in Q3, which confirmed a preliminary estimate released on 14 November. The result was virtually in line with the 0.5% decrease the markets had expected and followed a 0.6% contraction in Q2.
The new data provided further evidence that the Russian economy is close to crawling out of the recession, but also showed that the recovery is slow and uneven. Domestic demand continued to deteriorate in Q3, but the pace of contraction was slower than in the preceding period, as signs of a recovery in private consumption and gross fixed investment were more evident. The contraction in household spending in the third quarter (Q3: -3.1 year-on-year; Q2: -5.2% yoy) was the softest since it began to decrease in Q1 2015. This mainly reflects the gradual improvement in the country’s inflation, wage conditions and labor market. Meanwhile, gross fixed capital formation decreased just 0.5% in Q3 (Q2:-4.3% yoy), since it continues to benefit from the ruble’s stabilization—on the back of higher oil prices—and improving confidence among Russian businesses in the country’s economic outlook. Government consumption contracted for a seventh consecutive quarter in Q3, mainly as a result of the measures taken to rein in spending due to the fall in oil prices since mid-2014.
On the external front, exports of goods and services rebounded and expanded 7.0% in Q3, which followed a flat figure in Q2. Imports fell by 3.0% in Q3 (Q2: -6.7% yoy), decreasing for a twelfth consecutive quarter, although Q3’s contraction was the slowest since Q1 2014. Due to the strong improvement in exports, the net effect of the external sector to overall economic growth was a substantial 2.5 percentage-point contribution in Q3, up from a 1.0 percentage-point contribution in Q2.
The Central Bank expects flat GDP growth in Q1 2017, stating that economic activity will continue to recover in an uneven fashion. The Bank expects household spending to grow moderately on the back of an increase in the savings rate and positive real interest rates supporting the attractiveness of savings. The Bank also signaled that investment activity will recover following improved expectations regarding Russia’s economic outlook, the gradual easing of lending conditions and a decreasing debt burden.
Following an expected 0.6% GDP contraction in 2016, and considering that the price for Urals oil will average USD 40 per barrel in 2017, the Central Bank expects the Russian economy to expand between 0.5% and 1.0% in 2017 before picking up to between 1.5% and 2.0% growth in 2018, assuming that Urals oil prices continue to average USD 40 per barrel—the Bank’s baseline scenario. However, the Bank suggests that a higher average oil price in 2017 and 2018 would mean an increase in foreign trade revenues, an improvement in confidence among economic agents and, ultimately, faster economic growth than the projection envisaged in the baseline scenario.
Author: Ricardo Aceves, Senior Economist