CIS' economy remains feeble in Q1
Worsening economic conditions in Russia and lower oil prices hit the economies of the Commonwealth of Independent States (CIS) in 2015 and more complete data have confirmed that weakness across the region continued at the outset of this year. An aggregate GDP growth estimate elaborated by FocusEconomics shows that, following the 3.0% year-on-year contraction in Q4 2015, the CIS economy decreased 1.1% in Q1. However, the Commonwealth’s economic downturn in Q1 was not as pronounced as expected as Russia—the region’s largest economy—was more resilient to heightened volatility in global financial markets and the renewed fall in oil prices, which touched lows of under USD 30 per barrel in January. Russia’s GDP contracted 1.2% year-on-year in Q1, which came in above the 3.8% decrease observed in Q4 and was better than the 1.4% contraction that Russia’s Ministry of Economic Development had expected. Nevertheless, the contraction in the region’s largest economy undeniably affected other CIS countries’ economic activity: economies such as Azerbaijan, Belarus, Kazakhstan and Kyrgyzstan contracted at the beginning of the year.
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The financial turbulence of early 2016 eased toward the beginning of the second quarter and oil prices, along with prices for other raw materials, entered into a phase of gradual, yet steady recovery. A rally in oil prices in the second quarter principally reflected a slow rebalancing process in the crude oil markets. This rebalancing has been further supported by a large number of unplanned production outages across the globe. Meanwhile, on 2 June, OPEC celebrated its 169th meeting and, as expected, disagreements between member countries regarding a strategy on oil production reappeared. Despite the disappointing meeting and the lack of consensus on a clear strategy, oil prices continued to rise.
Economic impact from Brexit likely to be limited
On 23 June, the United Kingdom voted to leave the European Union and the result is expected to generate a period of prolonged global uncertainty with implications for economic growth, monetary policy and commodities markets worldwide. Shortly after the official result of the referendum was announced, the pound sterling tumbled over 11% and stocks fell across the globe, losing a total of USD 2 trillion. The price of crude oil was not the exception; both Brent and WTI crude oil prices fell by almost 5% and the decline continued on 27 June, with prices falling further and the British pound plunging to a 30-year low as news of a potential UK recession spread.
Heightened volatility in global financial markets and commodities prices had caused enormous economic stress in the Commonwealth of Independent States in 2015 and the beginning of 2016. However, the referendum result is likely to have only a limited impact on the region. The principal transmission mechanism to the Commonwealth’s economy will be through lower commodities prices and an economic slowdown in the European Union. Furthermore, the exposure of most CIS economies, in particular the Russian economy, to the UK is modest. Russia’s exports to Britain totaled USD 7.5 billion in 2015, which account for just 2.2% of Russia’s total exports. Moreover, against a backdrop of Brexit jitters, uncertainty among global investors could prompt capital outflows from the CIS region and other emerging-market regions, which, in turn, could lead to a renewed weakening of CIS currencies against the U.S. dollar. However, since investors have already sharply reduced both portfolio and direct investment in the region last year—mainly in Russia due to Western sanctions—the impact of capital flights on the CIS currencies and investment dynamics is likely to be limited.
Heading into the second half of 2016, the outlook for the Commonwealth of Independent States improved for a second consecutive month as data suggest that the Russian economy remains in recovery mode. This is good news for the region’s prospects this year, but slower growth in China, the potential for renewed volatility in global financial markets in the wake of the Brexit, as well as geopolitical risks cast a shadow on the outlook. Analysts surveyed this month by FocusEconomics expect the Commonwealth’s economy to contract 0.5% this year, which is revised up 0.2 percentage points from last month’s forecast. Next year, analysts predict the economy will bounce back strongly and expand 1.6%.
BELARUS | Weakness carries over into Q2
Reduced remittances inflows and the spillover effects from Russia’s economic downturn caused the Belarusian economy to contract for the first time in nearly 20 years in 2015. Ongoing weakness in neighboring Russia and still-low oil prices have kept economic activity depressed, resulting in the fifth consecutive contraction in Q1. Although Q1’s softer contraction should come as good news, latest data from Q2 confirm that economic activity remains weak. In May, industrial production expanded for the second consecutive month while the pace of contraction in retail sales sped up. Meanwhile, the IMF stated in June that negotiations for a USD 3.0 billion loan would continue into the second half of the year. Although the Fund noted that Belarus has made significant improvements in fiscal matters, reforms in state-owned enterprises and utility pricing—a necessary prerequisite for the loan disbursement—were thus far insufficient.
The economy’s outlook is grim. Weak external and domestic dynamics coupled with debt repayments in foreign currencies are constraining growth prospects. Furthermore, a feeble economic recovery in Russia will keep remittances inflows and export growth depressed. FocusEconomics Consensus Forecast panelists see GDP falling 1.8% in 2016, which is down 0.3 percentage points from last month’s forecast. For 2017, the panel projects that the economy will rebound to a 1.4% expansion
KAZAKHSTAN | Deterioration persists in Q2 following a GDP contraction in Q1
An acute fall in oil and gas prices at the start of the year along with a protracted recession in Russia took a heavy toll on the Kazakh economy, which contracted in Q1 for the first time since 2009. Moreover, the deterioration in industrial production worsened in May on the heels of a sharp drop in mining output. This is an indication that the contraction in GDP deepened further in Q2. A land code amended on 21 May, which came into force on 1 July, has led to several protests across the country. Demonstrations like this are rare in Kazakhstan and the government took a cautious approach and has not attempted to crack down on the protests. However, in late May, the General Prosecutor’s Office alleged that the protests were staged in an attempt to seize power and hundreds have been arrested. President Nursultan Nazarbayev reshuffled a number of senior government figures in late June with the aim of improving his administration’s image. The President also imposed a moratorium on the more relevant structural reforms until the end of the year. However, that has failed to pacify many opponents.
Kazakhstan’s recession is expected to have bottomed out in H1 and GDP is seen rebounding in H2. However, downside risks to the outlook persist in the form of heightened volatility in financial markets, a slow recovery in commodities prices and a protracted recession in Russia. Economists surveyed this month expect the economy to expand 0.3% in 2016, which is unchanged from last month’s forecast. Next year, GDP is seen accelerating to a 2.2% expansion.
RUSSIA | Key factors behind recovery: rebound in oil prices and less FX volatility
The Russian economy was more resilient to the second oil shock in January: in Q1, GDP decreased 1.2% annually, which was a softer fall than expected. A detailed breakdown of data by economic sectors showed that agriculture continued to expand in Q1 and growth in mining activity picked up over the previous quarter, while the manufacturing sector contracted, although the pace did slow. Even though domestic demand is expected to be sluggish in the coming quarters, green shoots in credit growth and industrial production suggest that the economy remains in recovery mode. The key factors behind the gradual recovery are the rebound in oil prices and the economy’s slow, yet painful adjustment to a weak ruble. On the political front, on 27 June, Turkish President Recep Tayyip Erdogan expressed his regret for the downing of a Russian warplane in November 2015, which had led to a deterioration in relations between Moscow and Ankara and the subsequent imposition of sanctions by Russia. The tone of the official Russian response suggests that the apology has been accepted and an improvement in bilateral ties appears likely.
The UK’s departure from the UE will send shockwaves across the global economy and is likely to have repercussions for the Russian economy, too, yet the impact is likely to be limited. The principal transmission mechanism is through lower commodities prices and reduced EU growth, as Russia’s direct exposure to the UK economy is modest. Analysts expect GDP to contract 0.9% in 2016, which was revised up by 0.2 percentage points over last month. For 2017, analysts see the economy rebounding and expanding 1.3%.
UKRAINE | Economy remains in modest recovery mode
After over two-years of contraction, Ukraine’s economy returned to growth in Q1, although the pace of expansion was meagre and driven mainly by base effects. Fewer military clashes and more stable price pressures have helped lead to a stabilization in economic data. The modest recovery path seems to have continued in Q2, with industrial production recording the fourth consecutive expansion in May. In the political arena, the Parliament approved a key judicial reform bill, the first major reform since the new government took office in April. The vote unlocked the third USD 1.0 billion loan from the United States and paves the way for a disbursement of IMF funds in July. Following the approval of the bill, S&P Global Ratings affirmed Ukraine’s B- rating and stable outlook as it is confident that the country will continue implementing structural reforms.
A more stable political environment and progress on the IMF program should help economic growth to pick up pace throughout the year. However, the economy will remain in a fragile state and the recovery is expected to be modest compared to last year’s pace of decline. The FocusEconomics panel sees the economy growing 1.2% this year, which is up 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP growth accelerating to 2.5%.
INFLATION | Inflation is stable again in May
Inflation in the Commonwealth has fallen from a peak of 13.8% in October 2015 to 7.9% in March and has remained stable at that level since then. According to a regional estimate, inflation was 7.9% in May and mainly reflected a stabilization in the evolution of Russia’s consumer prices. Furthermore, inflation fell in Armenia, Belarus, Moldova and Tajikistan, whereas the economies of Azerbaijan, Kazakhstan and Kyrgyzstan registered higher inflation in May.
Most of the regional currencies stabilized in the second quarter following a period of instability. This has caused inflation to fall and is projected to fall further in the coming months. Economists surveyed this month by FocusEconomics expect inflation in CIS to end this year at 7.6%. This month’s forecast was cut by 0.4 percentage points over the previous month’s Consensus. Looking forward, analysts predict that inflation in the region will fall further to 6.1% in 2017.
Written by: Ricardo Aceves, Senior Economist
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