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Russian economy: a slowdown before policy-driven re-acceleration

December 3, 2013

by Constantin Gurdgiev

In the generally subdued economic environment in the Western Europe and continued recessionary pressures across other parts of the CIS and former Soviet Union, Russian economy posted significant slowdown in the rate of growth over Q2 2012 and Q2 2013. This trend continued into Q3 2013, with latest figures showing real GDP growth of 1.2% year on year. This puts 2013 growth forecast closer to 1.4-1.6% in real terms and well below beginning of the year consensus forecasts of 2.2-2.7%. H1 2013 growth came in at 1.6%.

This still compares positively to the region’s second largest economy – Ukraine, where the recessionary dynamics continued into Q3 2013 with GDP shrinking 5.6% y/y.

Russia’s household consumption growth and low unemployment acted as main supports for growth in 2013, with real wages up 8.2% y/y in September, and retail sales expanded 3%. Meanwhile, industrial production grew only 0.3% y/y, construction sector activity was down 1.1% y/y and fixed investment fell by 1.4% y/y over the first nine months of 2013.

Driven by domestic demand and wages inflation, overall trends for prices are still a significant concern for the Central Bank. Annual inflation stood at 6.3% in October, up on 6.1% in September. The Central Bank responded to sticky inflation by raising inflation target from 4.5% to 5.0% and abstained from cutting rates. Given weaknesses in overall growth, however, it is likely that in coming months Bank Rossiy will move to cut rates once again, especially as the ongoing relaxation of the rubble intervention bands has strongly signalled the Bank view that weaker rubble is required to increase exports competitiveness.

Assuming continued benign commodities prices trends, we can expect Russian economy to gain some momentum in Q1 2014 and move back toward the annual GDP growth rate of ca 3-3.2% in 2014. The risks to the downside are: continued strong inflation and possible fall-off in commodities prices should Western Central Banks begin aggressively to unwind their extraordinary monetary policies supports in H1 2014.

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