Russia: Economy loses momentum in Q4
Growth lost steam at the tail end of 2023, with GDP increasing 4.9% on an annual basis in the fourth quarter (Q3: +5.7% yoy). Q4’s reading marked the weakest result since Q1 2023. On a seasonally adjusted quarter-on-quarter basis, economic growth waned to 0.8% in Q4, compared to the previous quarter’s 0.9% expansion. Q4’s reading was the softest since Q2 2022. Despite Q4’s annual moderation, the economy rebounded in 2023 as a whole, expanding 3.6% (2022: -1.2%).
The annual moderation was broad-based and chiefly reflected weaker external demand amid lingering international sanctions.
Domestically, private consumption growth waned to a three-quarter low of 7.3% year-on-year in Q4 from a 9.7% expansion in Q3: Purchasing power was likely dampened by higher inflation and a tighter monetary policy backdrop in H2 2023. Similarly, public spending growth was the slowest in a year, expanding 5.9% (Q3: +7.1% yoy). That said, fixed investment growth ticked up to 8.1% in Q4 from a 7.7% increase in the previous quarter.
The release did not provide data on the external sector performance in Q4. However, looking at the available trade date, the annual fall in merchandise exports accelerated to 26.0% from the previous quarter’s 23.0%. Similarly, merchandise imports slid into contraction, suggesting that the external sector took a hit in Q4.
Our Consensus is for the economy to have lost further steam in the first quarter of 2024 and for growth to nearly halve overall this year compared to 2023. Still-tight monetary policy and higher price pressures will restrain private spending growth. This, paired with weaker external demand amid lingering sanctions and lower oil and gas exports, will weigh on economic growth.
Analysts at the EIU commented on the outlook:
“We maintain our forecast of muted growth throughout the forecast period, driven almost exclusively by war-related government spending and investment […] Low external demand for some Russian goods, as well as component scarcity, will lead to productivity issues in certain industrial sectors. Following the military mobilisation, the exodus of the working-age population—either to fight in Ukraine or as migrants elsewhere—will continue to weigh on productivity.”
Fitch Solutions analysts were more optimistic regarding growth:
“We have raised our 2024 forecast for GDP growth from 1.4% to 2.8% to reflect the stronger footing of the economy. Key to the economy’s performance through the war has been fiscal spending in defence to aid the war efforts which remains closely linked to fixed capital formation growth. In 2024, the government has earmarked 6.0% of GDP worth of military spending, which would be a 30-40% increase in spending from estimated 2023 levels.”