The country’s GDP deteriorated by approximately 18% q-o-q in the 1Q14, the steepest decline since 1Q09. On a yearly comparison, the growth is 0.9%, the slowest since the 4Q09. Despite the weather-related seasonality of Russia’s GDP growth which usually causes the GDP to moderate, the figure this time suggests that there is another trigger behind the slide. Yet detailed data about the GDP components has not been published. Nevertheless, capital outflow from the private sector – which was announced at $50.6 billion in the 1Q14, up from $27.5 billion a year earlier – is an obvious candidate.
At the end of May, the Russian ruble depreciated 5.9% against the US dollar as compared to the beginning of the year. As a result, the Russian central bank already increased the interest rate twice this year to 7.5%, aiming to curb inflationary pressures from the weakening currency.
The unemployment rate dropped for the second consecutive month to 5.3% in April of 2014 from 5.4% in the previous month. A year earlier, unemployment was recorded at 5.6%. The services sector in Russia remained in contraction during May with the services PMI falling to 46.1 in May from 46.8 in April. On the manufacturing side, the PMI indicates a continued downturn in Russia’s manufacturing sector in May. Production showed a further slide, as did employment and new export orders. The manufacturing PMI remained below 50.0 in May, at 48.9 from April’s 48.5. According to the PMI, total new orders increased for the first time since November 2013. While demand in manufacturing showed signs of recovery, the service sector marked a deterioration of key economic activity indicators. The 12-month outlook for services activity improved further in May but remained weak. Positive sentiment was linked to an expected recovery in demand, while firms expecting lower activity cited political uncertainty, inflation and weaker investment spending as reasons.
While the pace of capital outflows is not seen as continuing as sharply as had occurred in the 1Q14 given the un-escalating political circumstances, both the services and manufacturing PMI surveys of May clearly suggest that the downwards movement in the economy of Russia has not yet hit bottom. The forecast for 2014 GDP growth is at 0.9% y-o-y, unchanged from last month. The risk continues to be skewed to the downside with a possible further downwards revision next month, if the downturns continue.