CIS Countries Economic Outlook June 2017

Recovery firms in Q1 as growth broadens across economies

CIS Countries: Recovery firms in Q1 as growth broadens across economies

June 7, 2017

Preliminary data showed that the Commonwealth of Independent States (CIS) started off 2017 on a brighter note as GDP growth gained traction in Q1. The region’s GDP grew 1.0% over the same period of last year, slightly undershooting our panelists’ estimates last month (Q4 2016: +0.6% year-on-year). If confirmed, Q1’s result will have marked the fastest growth since Q3 2014 as the region recovers from two years of meagre activity.

Looking at the individual economies, Russia’s recovery gained steam in the first quarter likely thanks to higher oil prices. The Russian recovery is having positive spillover effects for many other economies in the region, particularly due to remittances and investment. Growth in Armenia hit a multi-year high in Q1 thanks in part to remittances flows and Belarus’ economy returned to growth after two years of contracting activity. In fact, growth improved in the majority of the region’s economies and Kazakhstan’s GDP expanding a robust 3.4% annually.

Growth is seen accelerating further in Q2 and FocusEconomics predicts the CIS region will expand 1.6%. The recent agreement to extend production cuts by OPEC and non-OPEC nations alike should support oil prices and economic activity across the region, in particular in Russia. However, oil prices are unlikely to return to previous highs and this could increase pressure to diversify economic activity in some countries.

Activity to build momentum this year

After upgrading the region’s 2017 outlook last month, FocusEconomics panelists held their GDP forecast unchanged for the CIS economy this month. A rebound in Russian growth should fuel the region to expand 1.5% in 2017 and growth is seen rising to 2.0% in 2018.

This month’s stable outlook reflected unchanged forecasts for two of the economies in the region, including heavy-weight Russia. Meanwhile, GDP growth forecasts were upgraded for Armenia, Belarus, Kazakhstan, KyrgyzstanMoldova and TajikistanAzerbaijan was the only economy for which our analysts cut their projections.

Regarding the three countries that are not included in the regional GDP aggregate, analysts lowered the 2017 GDP growth forecasts for Georgia and Ukraine, while Turkmenistan’s outlookwas left unchanged. Ukraine’s prospects remain particularly bleak as tensions with the rebel-held area have thrown the country’s recovery off course. 

See the Full FocusEconomics CIS Countries Report     

BELARUS | Economy exits recession

According to a recently released flash estimate, Belarus’ economy emerged from recession in Q1, when it grew 0.3% year-on-year. Growth should continue to slowly regain its footing throughout the rest of the year thanks to a weak currency that fosters exports and Russia’s recovery—the country’s main trading partner. However, public investment and private consumption will remain constrained this year due to the government’s fiscal woes and a stubbornly high inflation rate that continues to erode consumers’ purchasing power.

Belarus’ economy is expected to make a slight recovery this year on the back of stronger growth in the CIS region as well as by revival in exports. Against this backdrop, FocusEconomics Consensus Forecast panelists forecast that GDP will increase by just 0.4% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, panelists see growth picking up to 1.5%.

KAZAKHSTAN | Rising oil output boosts momentum

Economic growth accelerated strongly at the start of the year, overshooting analysts’ expectations of a softer acceleration. According to a first estimate released by the Statistics Institute on 19 May, GDP growth came in at 3.4% in Q1, on the back of strong industrial production growth. The Kazakh economy has benefitted from the rise in global oil prices, reflected in the mining sector’s return to growth in the first quarter. But it has only done so because of the government’s decision to disregard its earlier OPEC pledge to cut crude production by 20,000 bpd for the duration of the agreement, which was extended in May to the end of Q1 2018. According to some estimates, crude production has risen by 40,000 bpd.

Higher commodity prices, stronger crude supply and the economic recovery in Russia will boost growth this year. Moreover, lower inflation is expected to shore up household spending, while lower interest rates and a brighter outlook for the oil industry will support investment. Analysts polled this month raised Kazakhstan’s 2017 growth forecast by 0.2 percentage points relative to last month’s estimate and expect GDP to increase 2.5%. For 2018, our Consensus Forecast shows a 3.0% expansion.

RUSSIA | Economy has bright start to the year

Growth gained steam in the first quarter as the recovery broadens, in part thanks to firmer oil prices. A GDP flash estimate showed a stronger than expected acceleration in Q1 and available data for Q2 point to a healthy start to the quarter: industrial production rose in April and the manufacturing PMI picked up in May. Overall, while signs of a recovery among households have emerged—the unemployment rate has fallen and retail sales data has improved—dynamics are expected to be largely tied to oil prices. In May, Russia along with the world’s other major oil-exporting countries agreed to extend production cuts until March 2018 in an attempt to support oil prices. However, a lack of compliance could threaten the deal’s effectiveness and in May oil output among some nations included in the agreement is expected to have risen. 

Recovering private consumption and higher oil prices should propel growth in 2017. The FocusEconomics panel sees GDP expanding 1.3% in 2017, which was left unchanged from last month’s forecast. For 2018, analysts see GDP growth accelerating to 1.7%.

UKRAINE | Economic blockade threatens fragile growth

The recovery hit a roadblock in the first quarter of the year as heightened tensions between the government and the rebel-held area led to trade disruptions and dampened activity. According to a preliminary estimate, GDP growth halved in Q1 coming in at a moderate 2.4%. Although details of the release are not yet available, the sharp deceleration is likely due to falling industrial production as a result of the blockade. Furthermore, data for the second quarter is bleak: industrial production fell at the sharpest pace in nearly two years in April. Meanwhile, a Swedish arbitration court ruled in favor of Ukraine in the first step of a likely long legal battle between the country’s Naftogaz and Russia’s Gazprom over gas contracts. A negative outcome for Naftogaz would likely threaten the company’s solvency but have limited effects on the Ukrainian government.  

The country’s outlook was downgraded for a third consecutive month on the back of weak incoming data. Our panelists shaved 0.1 percentage points off Ukraine’s GDP forecast this month. The FocusEconomics panel sees GDP rising by 2.2% this year and growth picking up to 2.9% in 2018.

See the Full FocusEconomics CIS Countries Report     


INFLATION | Inflation continues to ease in April

Inflationary pressures in the CIS economy continued to abate at the start of Q2. An aggregate estimate showed that inflation in the region declined from 4.7% in March to 4.2% in April, marking a new multi-year low. The drop mainly reflects lower price pressures in Russia.

Inflation is expected to stabilize at the current level in the coming months, and to increase toward the end of the year. The analysts we surveyed forecast inflation to end 2017 at 4.8%, which is down 0.1 percentage points from last month’s projection. Going forward, inflation is projected to fall to 4.6% in 2018.

Written by: Angela Bouzanis, Senior Economist

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