Russian economic output continues to shrink, solid recovery likely in late H2 2016

Economic output of Russia continues to contract; however, macro indicators suggest that growth is attempting to secure a footing around zero, noted Danske Bank in a research report. The second quarter preliminary economic growth data of Russia indicated that the economy shrank 0.6 percent year-on-year, as compared with consensus projection of a contraction of 0.8 percent and first quarter’s 1.2 percent fall.

Even if industrial output, agriculture and transportation are assisting the Russian economy, retail and construction sectors are recorded negative reports. Output and demand in July 2016 indicate that stabilization continues; however the path continues to be fragile, stated Danske Bank.

“The development of macro indicators continues to be L-shaped and we expect a more solid recovery late in H2 16”, added Danske Bank.

In July, Russia’s industrial output growth unexpectedly came in negative at -0.3 percent year-on-year, following a 1.7 percent growth registered in June. Sequentially, industrial production grew 0.3 percent month-on-month seasonally adjusted. The demand side rebounded a bit, remaining in negative territory. However, real wage growth continued for the third straight month in July as disinflation resumed.

“We remain sceptical about a consumer demand expansion before Q4 16 at the earliest and do not see the current marginal real wage growth affecting the central bank’s inflation targeting”, stated Danske Bank.

On the output front, agricultural sector expanded 4.9 percent year-on-year in July, expanding 3.2 percent yearn-year in 7M 16 as Russia’s countermeasures about food imports stimulated local supply. Production of food rose 2.6 percent year-on-year in 7M 16. Meanwhile manufacturing declined unexpectedly and chemical production contracted for the first time in 20 months.

Russia’s jobless rate continues to be low, moving down a notch to 5.3 percent in July, whereas the year-to-date average fell to 5.7 percent in July from June’s 5.8 percent. Real wage growth and labor market flexibility continue to help employers, alleviating the pressure of the increasing pay-productivity gap.

“We keep our 2016 GDP growth forecast for Russia at -0.6 percent y/y (Brent average assumption USD48.6/bl). We also retain our 2017 GDP forecast of 1.2 percent y/y”, said Danske Bank.

The major risks on the downside to the macro projection remain a downturn in oil price, rising inflation, the RUB’s high volatility, worsening geopolitical sentiment and lagging monetary easing.