Russia: Economy records best growth reading since Q4 2021 in Q2 2023
According to a preliminary reading, GDP rebounded in the second quarter, increasing 4.9% year on year, above the 1.8% contraction tallied in the first quarter and surprising markets on the upside. Q2’s reading marked the best result since Q4 2021 and the first expansion since Q1 2022.
The preliminary release did not provide a breakdown by expenditure or production. However, available data suggests that the improvement was broad-based. Industrial output rebounded strongly in Q2 on recovering manufacturing activity, thus pointing to a robust production-side performance. Meanwhile, soaring retail sales—thanks to a tight labor market and higher wage growth in April–May—indicated recuperating consumer demand. A loose monetary policy stance and elevated government spending should have further shored up domestic demand in Q2.
The majority of our panelists now see the economy expanding modestly this year. The projected recovery will be chiefly thanks to solid consumer demand and the government’s military spending spree driving overall consumption growth. That said, with a stretched fiscal capacity, productive capacity falling and monetary policy having tightened again from end-July, growth will likely lose momentum in the coming months.
Commenting on the GDP outlook, analysts at the EIU remained downbeat:
“Our assumption is that Russia’s economy will remain under severe downward pressure [this year] as a result of Western sanctions. […] The ban on the sale of technological goods to Russia will lead to shortages, and industries will struggle to maintain pre-war levels of productivity as they deplete existing stocks. […] Following the military mobilisation, the exodus of the working-age population, either to fight in Ukraine or as migrants elsewhere, will be a big hit to productivity.”
On the external sector and investment backdrop, EIU analysts were similarly pessimistic:
“The economy will not be boosted by a large trade surplus, as was the case in 2022. Oil flows to China, India and Turkey will offer some respite, albeit at lower prices. […] We expect investment growth to remain bleak in 2023 as foreign companies continue to scrap their Russian operations or scale back their presence over fear of sanctions and a hostile regulatory environment.”