Russian economy to contract less severely in 2016, household consumption to continue falling

Oil price forecasts for 2016 and the following five years have been downgraded by the World Bank and the IMF. According to IMF, Brent crude is unlikely to return to USD 50 per barrel before 2021. Under such scenario, forecasts for Russian economic growth have also been tapered.

According to Standard and Poor’s estimate, Russia’s oil and gas sectors contribute around 20%-25% to the GDP. But recession in Russia in 2016 is not expected to be as severe as it was in 2015, before the economy returns to growth in 2017, according to BNP Paribas.

Initial economic data for early 2016 suggests that the pace of economic contraction is slower than it was in 2015. Retail sales in the country dropped 5.9% y/y in February 2016, as compared to the decline of 7% in the same period last year. Meanwhile, inflation decelerated considerably to 8.1% y/y from 16.7% in 2015. Moreover, the real wages declined just 2.6% y/y in February, as compared with the drop of 7.4% in the same period last year. However, consumer consumption is expected to continue declining in 2016 if nominal wage growth does not accelerate considerably, noted BNP Paribas.

In February, manufacturing production declined 1% y/y, as compared to 2.8% drop in February 2015. Admittedly, production of water, gas, electricity and machine tools increased. Meanwhile, agricultural output and mining output continued to be solid. But if company investment does not recover markedly, growth will struggle to return, added BNP Paribas. Lending to firms continue declining, in spite of increasing profits.

Monetary policy is not accommodative enough to urge firms to invest. The central bank is not expected to further lower interest rates under the present scenario of pressure on oil prices and subsequently on the ruble, noted BNP Paribas. Therefore, the monetary policy does not have much room to support economic activity, in spite of moderating inflationary pressure.