Russia Economy - August 2016

The Economy Ministry announced that the first GDP estimate shows a contraction of only 0.6% y-o-y in 2Q16, after a 1.2% decline in 1Q16. This represents the smallest contraction in the economy since it fell into recession in 1Q15. The Ministry reported that “industrial production, transport and agriculture were the main factors behind the contraction slowdown, while construction and retail sales continued having a negative impact”. After appreciating 0.5% m-o-m vs. the dollar in June, the ruble appreciated 2.5% in 2Q16, compared with depreciation of 0.7% in 1Q16. It continued appreciating in July by 1.7% m-o-m. Inflation continued posting sub-8% readings for the fifth month in a row in July, registering 7.2%. By leaving its benchmark interest rate at 10.5% in July, the central bank showed its cautious approach towards inflation, which severely hit household consumption the previous year. Another deterioration in the business conditions of the manufacturing sector in July was reported by the IHS Markit manufacturing PMI survey. The index went back into contraction territory the previous month amid a decrease in new business and slower production growth alongside less employment. The index posted 49.5 in July, from 51.5 a month earlier. On the other hand, business conditions in the services sector improved in July, according to its respective PMI. The survey showed the fastest pace of growth in output since February 2013, together with highest increase in new orders for 42 months, which lead to job creation in the services sector. On a related note, a slower contraction in retail sales continued in 2Q16. It dropped by 5.6% y-o-y in 2Q16 versus a 5.8% and 12.5% contraction in the previous two quarters, respectively. A notable slowdown in the GDP’s rate of contraction in 2Q16 with strong performance in the services sector and an unemployment rate that is under control, along with easing inflation, have all prompted a GDP forecast revision for 2016 to a deceleration of 0.8% instead of the previous contraction figure of 1.0%. For 2017, the forecast remains at 0.7% growth.