Russia Economy - July 2017

Improvements in household consumption and gross fixed capital formation (GFCF) were larger than the negative impact of lower net exports in 1Q17, leading to GDP growth of 0.5% y-o-y. Household consumption posted its first growth in 1Q17 after two consecutive years of contraction, expanding by 2.7% y-o-y compared with a 3.2% y-o-y contraction in the previous quarter. The GFCF increased in 1Q17 for the first time in nearly three years. It expanded by 2.3% y-o-y in 1Q17, from a 0.3% y-o-y drop in 4Q16. Net exports, however, were lower by 17.6% y-o-y in 1Q17, from growth of 21.5% in 4Q16. Imports increased much faster than exports, expanding by 16.5% y-o-y in 1Q17 vs 7.1% y-o-y growth in exports.

The ruble depreciated by another 1.3% m-o-m in June, following a similar path one month earlier. Inflation was largely stable at 4.1% y-o-y in May, unchanged from the previous month and close to the central bank’s target of 4.0%. The central bank lowered its benchmark interest rate by 25 bp to 9% in June.

The IHS Markit Russia manufacturing PMI signalled marginal improvement in the sector’s business conditions in June, posting 50.3 that month, down from 52.4 in May. Slowing growth in new orders was cited as a main factor behind a relative deceleration in the pace of growth. Industrial production rose by 5.6% y-o-y in May, the highest rate of growth since February 2012. The services activity PMI also suggested a strong rate of growth in the services sector in June for the seventh consecutive month. The index stood at 55.5 in June, down from 56.3 the previous month. The survey highlighted softening inflationary pressure and solid growth in new orders. For the second month in a row, retail sales were increasing in May. The rate of increase was 0.7% y-o-y, higher than April’s 0.1%.

Continued improvements in Russia’s non-oil private sector, in particular the services sector, together with easing trends for inflation and interest rates, confirm that the 1Q17 GDP of 0.5% was the beginning of a positive trend in economic activities for 2017.

The Russian GDP is anticipated to grow by 1.2% and 1.4% y-o-y in 2017 and 2018, respectively.