Russia Country Report - September, 2017
Russia’s economy continued to expand thanks to investment, which is mainly a function of continued infrastructure spending by exporters and the state, which, however, is not enough to offset weakness in other GDP components, most notably consumption and public spending. Therefore, analysts remain cautious on Russia's growth prospects this year, despite the strong performance seen in 2Q17.
Growth over the first half of the year had already started to slow again by August as the economy ran up against its structural limitations that caused the economy to start slowing in 2013. The chances of the deep structural reforms starting before the presidential elections in September 2018 remain very small.
Economic growth decelerated sharply from 2.9% y/y in June to 1.5% y/y in July, according to the Economy Ministry. Given the previously reported modest 1.1% y/y industrial production growth, analysts do not see this deceleration as surprising and view it as a return to normal levels after the unusually high 2.5% y/y increase reported in 2Q17 due to weather factors and a one-off boost to investments. Alfa Bank target 1.2% y/y growth for 3Q17 and forecast 1.4% y/y for 2017.
In July the construction industry – a proxy of investment – demonstrated the strongest dynamic out of all the key segments of the economy: construction volumes increased by 7.1% y/y after a rise by 5.3% in June and 3.8% in May. Fixed investment rose by 4.8% y/y in 1H17, which means that in 2Q17, investment rose by more than 7% y/y (vs 2.3% in 1Q17), the highest growth rate in 5 years.
At the same time, the picture in all the other segments remained fairly bleak, e.g., growth in retail sales slowed to 1% y/y (from 1.2% in June), the slump in agriculture deepened to -2.9% y/y (-1.3% in June), volumes of paid services for the population declined by 0.8% y/y (-1% in June), while contraction in the volumes of residential construction continued (-5.4% y/y vs -6.6% in June).
After posting zero y/y growth in June, real disposable incomes fell again in July (-0.9% y/y), despite some acceleration seen in real wage growth (4.6% y/y vs 3.9% in June). The unemployment rate remained stable at the low level of 5.1%.
One-off factors that boosted output in 2Q17 – such as calendar and weather factors – are no longer at play. The ruble's long run toward appreciation also ended 3 months ago, which means that the recent spike in consumption that it had supported could soon be coming to an end.
On a positive note, the low inflation environment and falling cost of borrowing will continue to offer the economy and the population support in the coming months, which means that investment will remain the prime driver of economic growth.
However, analysts say the chances of a significant acceleration in the growth dynamic will remain slim – this year, Russia's GDP is unlikely to significantly exceed the growth rate seen in 1H17 (1.5% y/y).
The ministry lowered the forecast for annual inflation in December 2017 to 3.7% from 3.8% in its updated macroeconomic forecast on August 31. At the same time, the ministry retained its forecast for inflation at the end of 2018, 2019 and 2020 at the level of 4%.
The Ministry of Economic Development also raised the GDP forecast in 2017 in the baseline scenario to 2.1% from 2% and in 2018 to 2.1% from 1.5%. The ministry increased its forecast for GDP growth in 2019 to 2.2% from 1.5%, and in 2020 to 2.3% from 1.5%.
In addition, the agency raised the forecast for investment growth in Russia in 2017 to 4.1% from 2%, and in 2018 to 4.7% from 2.2%, as well as improving the forecast for growth in investment in the baseline scenario in 2019 to 5.6% from 2% and in 2020 to 5.7% from 2.1%.
1.0 Executive summary
2.1 Most Russians still get their news from TV
2.2 Russian business and consumer confidence
2.5 Putin & government’s popularity
2.6 Politics - misc
2.7 Polls & Sociology
3.0 Macro Economy
3.1 Macroeconomic overview
3.2 Macro outlook
4.0 Real Economy
4.1 Industrial production
4.2.1 CPI dynamics
4.3 Industrial sectors and trade
4.3.1 Producers PMI
4.3.2 Corporate profits dynamics
4.4 Fixed investment
4.5 Labour and income
4.5.1 Labour market, unemployment dynamics
4.5.2 Income dynamics
4.5.3 Retail sector dynamics
4.5.4 bne Despair index
5.0 External Sector & Trade
5.1 External sector overview
5.2 Balance of payments, current account
5.2.1 Import/export dynamics
5.2.2 Current account dynamics
5.2.3 Capital flight dynamics
5.2.4 Gross international reserves
6.0 Public Sector
6.1.1 Budget dynamics - specific issues…
6.1.2 Budget dynamics - tax issues
6.1.3 Budget dynamics - funding, privatization
6.1.4 Budget dynamics - non-oil deficit
6.2.1 Local debt market dynamic
7.1 FX issues
8.0 Financial & capital markets
8.1 Bank sector overview
8.1.5 NIMs & CARs
8.1.7 Banks specific issues
8.1.7 Banks hit by liquidity squeeze
8.1.7 CBR takes over Otkritie FC
8.1.8 Bank news
8.2 Central Bank policy rate
8.3 Stock market
8.3.1 Equity market dynamics
8.3.2 Dividends dynamics
8.3.3 ECM news
8.4 International ratings
8.4.1 International ratings - specific details of rating actions corp/regional etc
8.5 Fixed income
8.5.1 Fixed income - govt funding plans
9.0 Industry & Sectors
9.1 Sector news
9.1.1 Oil & gas sector news
9.1.2 Automotive sector news
9.1.3 Aviation sector news
9.1.4 Construction & Real estate sector news
9.1.6 Agriculture sector news
9.1.7 TMT sector news
9.1.11 Transport sector news
9.2 Major corporate news
9.2.1 Oil & gas corporate news
9.2.2 Automotive corporate news
9.2.3 Aviation corporate news
9.2.4 Construction & Real estate corporate news
9.2.5 Retail corporate news
9.2.6 Agriculture corporate news
9.2.7 TMT corporate news
9.2.9 Utilities corporate news