Russia’s investment demand prospects remain gloomy, says Danske Bank

The economic output prospects of Russia’s economy continue to be unstable as industrial output contracted 0.8 percent year-on-year in September as compared with the growth of 0.4 percent a month earlier. This was in contrast to the positive expectations and those of consensus and strong manufacturing PMI figures.

But amongst the bigger components, the sharpest drop was recorded in manufacturing, whereas mining continued to record a strong growth along with utility production. Within manufacturing, vehicle production was the strongest, whereas construction-related items were contracting.

“Looking at construction figures as a proxy for fixed investments (Russia’s statistical service stopped publishing data on fixed investments early in 2016), we conclude that investment demand prospects remain gloomy: construction fell 4.2 percent y/y in September, shrinking 4.4 percent y/y in 9M”, said Danske Bank in a research note.

Meanwhile, the agricultural sector continued to give positive results. The sector recorded a growth of 1.7 percent year-on-year in September. In the nine month of 2016, the sector grew 3 percent year-on-year. Food production rose 2.2 percent annually in 9M 2016.

The demand side surprised positively, while staying in negative territory for the last 21 months, noted Dankse Bank. In September, retail sales contracted 3.6 percent annually, as compared with the consensus expectation of 4.4 percent contraction. Non-food sales performed better than food, declining just 2.8 percent annually in September.

Private consumption has been underpinned by a stable RUB rate and strong disinflation through accelerating real wage growth that was the strongest in 2.5 years. However, the positive news on the demand side is disappointing for monetary doves as it is an evident sign for the Russian central bank to extend its hawkish approach in an attempt to remain consistent in attaining the inflation target rate by 4 percent by the end of 2017. Therefore, market pricing suggests that a rate reduction has moved further into 2017, said Danske Bank.

“We expect the CBR to deliver its next rate cut in Q2 17 at the earliest, which poses downside risks for our 2017 GDP projection of 1.2 percent y/y”, added Danske Bank.