Russia’s economic performance has turned out stronger than expected in recent months due to strong domestic demand offsetting weakness seen in its export markets. Retail sales increased 9.2% in September year-on-year, despite the slowdown in car sales. The labour market also remains firm and the seasonally adjusted unemployment rate remained at 6.6% in September. Consistent with the significant expansion of consumption, capital investments rose by 8.5%, also surpassing expectations. At least some parts of the strong domestic demand is related to rapid bank credit expansion, which has been manifested by a 21% increase in corporate loans on an annual basis.
However, it is expected that the lending rates to be raised in the coming months will make investment activities difficult—hence, the possibility for lower economic growth in 2012. Weaker output and cargo volumes of construction materials imply that the construction sector growth might contract in the coming months. According to estimates from the Ministry of Economic Development of the Russian Federation, real GDP growth remained robust in August and year-on-year economic growth rate in July reached 5.2%, above the 4.1% average for January-August. As mentioned earlier, this has been mainly due to strong growth in domestic demand.
Despite a moderate increase in real wages and household income, strong growth in retail sales was reported in September. The rise in retail sales, therefore, might have come from negative growth in household savings in favour of consumption stimulated by consumer credit expansion. The latest data also indicate improvements in the corporate financial situation. The increase in investments has been evident in machinery and equipment imports, which accounted for 49% of imports in August. Despite strong domestic demand, industrial production appears to be losing momentum. In August, industrial output rose by 6.2% on an annual basis, followed by a month-on-month decline of 0.2% in July. This has been mainly due to a slowing down of the growth rate for machinery despite a growth in the production of passenger cars, which expanded by 46.4% in August, year-on-year. Machinery and equipment also continued to grow at a fast rate of 9.8% compared to last year.
In addition, basic construction material grew by double digit rates. The outlook for manufacturing appears uncertain, based on regular business sentiment surveys. The Markit PMI in September was 50 compared to 49.9 in August, but down from the 54.8 recorded for 1Q11. A Rosstat (Russian Federal States Statistics Service) survey of industry in September indicates that although a majority of enterprises in the survey expect an increase in their output during 4Q11, the proportion of these companies has been declining steadily for several months. Consumer price inflation decelerated in September, mainly due to falling food prices. The consumer price index rose by 7.2% on an annual basis, the lowest rate since September 2010.
However, with regards to the price inflation of non-food items, there have been no significant changes. On the other hand, the producer price index in manufacturing rose by 15.8% year on-year in August. This mainly reflected price increases in the refining and chemicals sectors, where prices are linked to world prices and the ruble (Rb) exchange rate. Producer price inflation for machinery was more modest and climbed 7.5% on an annual basis in August. The Ministry of Finance of the Russian Federation has forecast a large surplus for the federal budget in January-August. The additional Rb 700 billion (around $24.5 billion) is expected from higher oil revenue.
The latest revision of the 2012-14 budget, submitted to the Duma, Russia’s Parliament, proposes a faster narrowing of the budget deficit compared to the first draft published in July. In the 2012 budget proposal, raising the oil price assumption to $100/b and increasing the GDP growth forecast to 3.7% has boosted the budget revenue by Rb 1,200 billion (around $37 billion). Although still heavily dependent on oil revenues, the 2012 budget also envisages the share of nonoil revenues rising from 51% in 2011 to 53% in 2012. This is to be made possible by reforms in tax policies.