Russia's sliding consumption implies extended recession into Q4

October real sector data for Russia were mixed, with production data improving and consumer data deteriorating further. Net-net this points to further downside risk for Q4 growth following stabilization in Q3.

The leveling out of production data continued in October. Industrial production has now improved for five consecutive months to -3.4% y/y, from the nadir of -5.4% y/y in May. This was equal to the forecast but better than the consensus. In seasonally adjusted terms, IP has now stabilized. Thus, the improvement in y/y IP reflects base effects rather than an increase in production, and IP has stopped declining, but has not yet started to improve. Similarly, manufacturing PMI has increased to the neutral "50", implying no further decreases, but not yet indicating increases. Finally, investment has been improving for three months to -5.2% y/y, from a low of -8.5% in July. With profits running at a better level in 2015 compared with 2014, investment seems to be stabilizing. Overall, these data suggest that production has mostly adjusted to the worse economic circumstances and is starting to benefit from improved incentives due to RUB weakness overcoming declining USD oil prices.

Consumption indicators point to further declines in consumer demand. For households, the further declines in global oil prices leading to additional fiscal adjustments and RUB weaknesses are still being incorporated into spending patterns. In October, the decline in real wages accelerated to -10.9% y/y, below expectations. The freeze on public sector wages combined with ongoing inflation led to further declines in real wages. The drop in real sales accelerated to -11.7% y/y and is now notably below the worst decline rate in 2009 (-9.4% in September 2009) and approaching the 1998 lows. Finally, there was a reversal in the labor market with employment dropping and unemployment increasing.

Russia's government policy has been oriented towards having households bear the brunt of the economic adjustments from lower oil prices and sanctions. Although GDP stabilized in Q3, rising an estimated seasonally adjusted 0.1% q/q, this will not prove to be the end of the recession. 

"We think lower oil prices and RUB weakness will push real GDP lower in Q4 by about -0.8%. However, this still leads to slightly better growth in 2015 of -3.7%, compared with the previous forecast of -4.0%. We have retained our growth forecasts for 2016 at 0.0% and for 2017 at 1.9% based on our commodity team's forecast of rising oil prices due to expected declines in excess supply", says Barclays.