Russia: GDP contracts in Q4 due to substantial deterioration in domestic demand
April 4, 2016
Russia’s economy registered the steepest contraction since 2009 last year as a combination of external factors—such as a plunge in oil prices and international sanctions—coupled with structural weaknesses took a heavy toll on growth. The economy contracted 3.7% in the full year 2015, which contrasted the meagre growth registered in the previous year. GDP decreased 3.8% annually in Q4, which followed the revised 3.7% decrease observed in Q3 (previously reported: -4.1% year-on-year). The result was marginally better than the 3.9% contraction the markets had expected.
Looking at a detailed breakdown of the data, Q4’s contraction was driven by a further deterioration in domestic demand, mainly due to a plunge in private consumption. Consumer spending tumbled dramatically, plummeting 12.5% in Q4—the worst result on record. Household spending was severely affected by the sharp weakening of the Russian ruble and a subsequent spike in inflation and was aggravated by rising unemployment, stagnant wages and an uncertain economic outlook. The other factor weighing heavily on the economy was a decrease in fixed investment; it fell 6.0% in the final quarter of 2015. Nonetheless, the drop was less steep than the previous quarter’s 11.3% contraction, although this continued to reflect slowing economic activity, the effects of international sanctions, a tight monetary policy and commodities producers’ cut in capital investment in response to low commodities prices. Meanwhile, the massive drop in oil prices throughout 2015 affected fiscal revenues and, consequently, government spending. Oil and gas account for nearly half of Russia’s government revenues and the plunge in oil prices prompted the government to slash spending, with government consumption contracting 1.7% in Q4 (Q3: -1.8% yoy).
The external sector held up well in Q4, as the sharp depreciation of the ruble supported exports of goods and services, which expanded 9.8% in Q4 (Q3: -1.4% yoy). On the other side of the balance, imports contracted 21.2% in Q4, which, nevertheless, was less pronounced than the steep plunges registered in the previous three quarters. The contraction in imports was the result of the ban that the Russian government imposed on imports from the European Union and other Western countries in retaliation for the international sanctions that these countries imposed on Russia. Russia also imposed sanctions on imports from Turkey and Ukraine amid the recent increase in geopolitical tensions.
The Central Bank projects that economic growth in 2016 will depend on the dynamics of energy prices and the economy’s ability to adapt to external shocks. In its baseline scenario, the Bank expects the price for Urals Oil to average USD 30 per barrel in 2016. As a result, the Bank foresees a more protracted recession than it had expected before. The Bank now expects the economy to contract at a rate of between 1.3% and 1.5% in 2016. For 2017, the Bank expects the price for Urals Oil to average USD 35 per barrel and foresees economic growth rising to within a range of minus 0.5% and plus 0.5%.
Author: Ricardo Aceves, Senior Economist