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Russia Economy – December 2012

Source: OPEC 12/21/2012, Location: Asia

The Federal Statistical Services has announced a 2.9% GDP growth in Q3 on a y-o-y basis. This is the slowest rate of growth since 2009. In September, agricultural output contracted 7.7% as severe drought left crops depleted. In addition, fixed capital investment dropped for the first time in 18 months, as a slowdown in China and recession in Europe persuaded many firms to scale back spending. Household purchasing power was hit by a pickup inflation throughout Q3, as reflected in a drop in retail sales growth. The October PMI survey for services also advanced to 57.3 from 54.5 in September despite a fall in export orders indicating that this sector might be regaining momentum as the economy enters Q4.

The Russian central bank has held the refinancing rate at 8.25%, following a 25 basis points rate increase in September. It seems that recent downbeat readings on the economy discouraged further monetary tightening. A slowdown in inflation to 6.5% in October also influenced its decision. However, the cost of food may rise on the back of a poor grain harvest, which could keep consumer price increase above 6.0% over the next six months. Meanwhile domestic demand continues to decelerate with real investment falling year on year.

A range of data released in September confirms that domestic demand growth is decelerating as rising inflation erodes the purchasing power of consumers. As a result, real wages growth slowed to 6.6% y-o-y in September from 11% in the first half of the year. Retail sales volumes increased by 4.4% on annual basis. The economics ministry has blamed monetary tightening by the central bank for the slowdown in demand growth. A sharp reduction in loan growth and rise in the cost of borrowing have contributed to the decline in investment. However, the domestic demand trend has yet to have a significant impact on output. The latest trends in demand make it more likely that the central bank may keep interest rate on hold in the near future (EIU, December 2012).

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