Russia Private Consumption (ann. var. %)

Private Consumption in Russia

Economic contraction continues to soften in Q1

GDP shrank at a softer pace of 1.9% year on year in the first quarter, on the heels of the 2.9% fall logged in the fourth quarter. The result marked the smallest decrease since Q1 2022, right before the fallout from Russia’s invasion of Ukraine pushed the economy into decline. Notably, the reading came in above the expectations of both market analysts and the Central Bank, who had penciled in a sharper contraction.

The preliminary release did not provide a breakdown by expenditure. On the production side, available data suggests that the overall contraction was led by declines in the retail and wholesale trade subsectors. At the same time, activity in manufacturing, agriculture and construction increased, thus softening the downturn.

The release did not provide any sequential data. However, based on the annual figure, the Russian economy seems to have expanded on a quarter-on-quarter basis in Q1. This expansion was partly thanks to soaring government spending that should have propped up both the industrial and retail sectors, and would mark the third consecutive quarterly increase, demonstrating that the Russian economy has largely weathered the shock of sanctions.

The outlook for the Russian economy remains volatile. While some of our panelists expect the economy to rebound this year in light of its stronger-than-expected resilience to Western sanctions and strengthening trade with China and some developing countries, other analysts forecast activity to remain in contractionary territory.

Commenting on the outlook, analysts at the EIU said:

“EIU expects the combined impact of war and sanctions to result in another year of negative growth in 2023. This year the impact will come from a sharply narrowing trade surplus. […] Russia’s fiscal capacity will be stretched in 2023. The high costs of the war and sanctions on the economy will put pressure on the federal budget. To maintain social support, the government will draw reserves from its National Wealth Fund. […] We expect real GDP in ruble terms to recover to 2021 levels only in 2027 (at the earliest).”