Russia: Economy is over the worst, strengthens at end 2016
February 3, 2017
The economy showed more resilience in 2016 despite low oil prices and the continuation of Western sanctions on Russia. A preliminary estimate released on 3 February suggests GDP contracted just 0.2% in 2016. The result was better than the revised 2.8% contraction in 2015 (previously reported: -3.7%) and the 0.5% contraction the markets had expected. The preliminary full-year estimate is consistent with the idea that the economy emerged from recession in the final quarter of 2016, putting year-on-year growth at around 1.0% in Q4, unless there are revisions to data in the previous three quarters.
Dmitry Polevoy, Chief Russia Economist at ING Bank, commented that, “the important thing is that the economy showed a stronger recovery at the end of last year.” He added that, “growing private consumption and investments will fuel headline GDP growth, and an improving expansion of exports will mostly offset the rebound in imports.”
The GDP result in 2016 also chimes with upbeat comments from Russian policymakers that the economy is over the worst of a protracted recession that began in 2015. A deal made by global oil producers late last year—with Russia’s endorsement—that aims to reduce the world’s oil glut is helping to prop up crude oil prices, which in turn will support Russia’s economic activity this year.
Last year’s GDP figure benefited from a softer deterioration in domestic demand, prompted by a slower contraction in both private consumption (2016: -5.0%; 2015: -9.8%) and government spending (2016: -0.3%; 2015: -3.1%). In addition, total investment grew 3.3% in 2016, contrasting the massive 13.0% plunge in 2015. This reflected a slower deterioration in gross fixed capital formation and a stronger restocking of inventories, suggesting that the government’s imports substitution program implemented during the crisis is bearing fruit. On the external front, exports of goods and services increased 2.3% in 2016 (2015: +3.7%), supported by a weak ruble, while imports decreased 5.0% in 2016, following the 25.5% plunge in 2015.
At the sector level, 2016 GDP benefited from a further increase in agriculture and a strong rebound in the manufacturing sector. However, depressed activity in the construction sector and weak growth in mining activity dragged on overall economic growth.
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 average USD 40 per barrel in both 2017 and 2018—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