Russia’s economic contraction is likely to have bottomed in Q3 15

Russia's September output and demand data signalled that economic contraction reached the bottom in Q3 15 as previously expected. The dip in fixed investments and industrial production was less (-5.6% y/y and -3.7% y/y, respectively) than expected while the demand side continues to disappoint on the back of the purchase power crash. As inflation remained high, real wages growth (-9.7% y/y) shrank the most in 16 years, pushing retail sales to their lowest level since 1998 (-10.4% y/y).

Manufacturing production data shows that certain sectors have started benefiting from import substitutions as western sanctions and Russia's counter measures have distorted the market. Foods production expanded 1.4% y/y and 8.1% m/m in September while continuing to grow 1.9% y/y in 9M. As in 2014, Russia has banned imports of certain foods items from the countries that introduced sanctions against it, the best performers being meat production (up 18.0% y/y), frozen fish processing (up 15.7% y/y) and cheese production (up 38% y/y). At the same time, rouble devaluation has supported exporters, helping chemical production to grow 9.3% y/y in September and, for instance, passenger car tyre production to expand 5.9% y/y.

"We expect local demand and the depreciated rouble to support industrial production further in the future while a lack of capacity remains a major concern in the medium term. However, as construction growth stays in negative territory, production sectors linked to industrial construction are losing the most. Metal and metal parts production was down 3.7% y/y in September and construction materials are following the same trend",says Danske Bank.

Russian consumers have suffered the most during the current recession. Purchase power fell to its weakest in years as 2015 average inflation is at 15.5% y/y, pushed up by the devalued rouble and limited supply due to Russia's counter measures. Food inflation has eased due to seasonal reasons and the trend is likely to continue further due to the base effect and realised transition of the devaluation into prices. On the other hand, the government has stopped wage increases in the public sector. Economists expect real wages to shrink further in 2016 as the future budget will see imminent cuts on the expenditure side. The unemployment rate fell to 5.2% in September from 5.3% a month earlier, continuing to support demand.

"We will revise our macro forecasts for Russia as more Q3 15 data continues to flow. We currently expect the economy to shrink 6.2% y/y in 2015 and expand 0.5% in 2016. Upside risks to our current forecasts include additional monetary easing and higher-than expected oil price", added Danske Bank.