Last year Russia’s economy contracted 3.7%, driven by extreme trade tensions with the US and EU and lower oil price. But the Russian economy appears to have stabilized since the start of 2016. The economy does not seem to be in contraction mode now, according to the monthly GDP data. Even if the economy is still weighed on by the sanctions imposed by the US and EU, the stabilization of oil price is giving some support. However, the economic outlook for 2016 does not seem upbeat.
According to confidence indicators, market participants still show a high level of doubtfulness. In recent months, confidence has worsened. The Russian economy is quite vulnerable due to extreme reliance on energy exports, which account for 70% of total exports and around 20% of GDP. A reserve fund was set up to cushion the instability in oil prices. However, it is no longer able to take in the developments. Meanwhile, declining government spending is additionally impacting the economy.
“We now expect a contraction of some 1% in 2016. In 2017 the economy is expected to grow some 1¼%”, said Commerzbank in a research note.
The Russian central bank had undertaken a wary approach in H2 2015. It stopped its rate reduction cycle to see if inflation pressure alleviates in line with its forecasts. Inflation in April decelerated to 7.3% y/y as compared with November 2015’s 15%. Core inflation also decelerated. According to the central bank, inflation is expected to slow down to 6% by the end of 2016 and to 4% by 2017. Inflation has slowed down mainly due to statistical base effects so far. However, those base effects have faded away.
“Against the backdrop of falling inflation we expect the CBR to cut rates by some 150 basis points as the year unfolds”, said Commerzbank.
