Russian economy to shrink 0.6 pct in 2016; consumer demand unlikely to expand before Q3

The Russian economy in the first quarter of this year contracted 1.2 percent year-on-year, as compared with contraction of 3.8 percent year-on-year in the last quarter of 2015. Given the Brent year average of USD 48.6 per barrel and on improved oil price outlook, the Russian economy is now expected to contract 0.6 percent year-on-year in 2016, said Dankse Bank in a research report.

The economy continues to adjust to a new normal of lower oil prices and western sanctions. In the January to April period, the GDP of Russia shrank 1.1 percent year-on-year and contracted 0.1 percent on sequential basis in April.

“We have cut our 2017 GDP growth forecast to 1.2 percent y/y from 1.8 percent y/y previously due to delayed monetary easing cycle,” added Danske Bank.

Output and demand data for spring 2016 indicate that stabilization continues. Meanwhile, development of macro indicators continues to be L-shaped and is likely to rebound strongly in the late second half of 2016. In April, Russia’s industrial production grew 0.5 percent year-on-year following a contraction of 0.5 percent in March. Industrial production’s seasonally adjusted monthly data show that growth remains positive.

Meanwhile, demand side recovered a bit while continuing to be in negative territory. However, real wage growth failed to gain momentum in April after recording positive growth in March. It dropped 1.7 percent year-on-year in April. The slightly negative real wage growth at present is likely to be in line with current economic contraction. Consumer demand is unlikely to grow before the third quarter of this year.

Meanwhile, the Bank of Russia surprisingly lowered its key interest rate by 50 basis points to 10.5 percent in June. The central bank stated that it cut rates because of steady inflation in spite of positive trends in the economy. The target rate of 4 percent year-on-year appears to be attainable by late 2017, according to CBR.

“We still expect the total cut to be 150 basis points in 2016 on gradual monetary easing,” noted Dankse Bank.

Russian inflation decelerated to 7.3 percent year-on-year in March from 9.8 percent in January. With the considerable rise in crude prices since January and stability in the ruble exchange rate, Russian CPI is expected to reach 6 percent year-on-year in December 2016.