Russia: Milder-than-expected contraction in GDP in Q1 reflects softer deterioration in domestic demand
July 14, 2016
Following a notable deterioration in the final quarter of 2015—when Russia’s economy registered the steepest contraction since 2009—GDP proved more resilient in the first quarter of this year. The economy contracted 1.2% in Q1 over the same quarter last year. The result was above both the 3.8% decrease registered in Q4 2015 and the 2.0% decrease the markets had expected.
A detailed breakdown by type of expenditure shows that the deterioration in domestic demand lessened in the first quarter as private consumption and government spending registered a softer contraction in Q1 than in Q4. Looking at the details, private consumption decreased 4.3% annually in Q1, which came in above the massive 12.5% plunge observed in Q4. The result suggests that the worst is over for Russian households, which have benefited from less volatility in the currency and a decline in inflation. Meanwhile, government consumption decreased 1.5% in Q1, which was a tad better than the 1.7% decrease observed in the previous quarter. The Russian government has responded to the economic downturn and the sharp fall in oil prices at the beginning of year by restricting additional spending. While the government cut spending in specific areas as well as in state-owned firms, it decided not to touch social spending. Moreover, in the economic plan drafted at the beginning of this year, the government stated that, in order to maintain the fiscal accounts in check in the wake of lower revenues from oil, the administration of President Vladimir Putin would tap the rainy-day National Fund. One factor weighing heavily on the economy was a deterioration in gross fixed capital formation in the first quarter (Q1: -9.9% year-on-year; Q4: -6.0% yoy), which reflects the cooling of economic activity, particularly in the industrial sector. Economic activity had been slowing since the second half of 2015 and the inertia persisted in Q1 due to the effects of international sanctions, a tight monetary policy and commodities producers cutting in capital investment in response to low commodities prices.
In contrast to domestic demand, Russia’s external sector deteriorated in Q1. Exports of goods and services contracted 5.6% in Q1—the sharpest drop since Q4 2014—and contrasted the 9.8% increase registered in Q4. The contraction was mainly the result of a drop in oil exports as a consequence of a renewed plunge in oil prices in January and occurred despite the sharp depreciation of the ruble. On the other side of the balance sheet, imports decreased a substantial 10.9% in Q1, which, nonetheless, was just under half of the 21.2% nosedive observed in Q4. Imports continued to contract at the beginning of this year mainly due to still weak domestic demand, but also due to the ban that the Russian government imposed on imports from the European Union—in retaliation for the sanctions the EU had imposed on Moscow—and those from Turkey and Ukraine amid a deterioration in diplomatic relations with these countries.
In June, the Central Bank revised its growth projections for this year and next. Given that the Central Bank expects that the price for Urals Oil will average USD 38 per barrel in 2016, it projects the economy to contract between 0.3% and 0.7%. The 2016 GDP growth forecast was revised up from the Bank’s previous estimate of a contraction of between 1.3% and 1.5%. Furthermore, the Bank expects the economy to expand at a rate of between 1.1% and 1.4% in 2017, assuming that Urals Oil prices will average USD 40 per barrel. Previously, the Bank had expected the price for Urals Oil to average USD 35 per barrel and had projected economic growth rising to within a range of minus 0.5% and plus 0.5% in 2017.
Author: Ricardo Aceves, Senior Economist