Preliminary Rosstat figures show Russian GDP growth in the first three months of the year was just 0.5% y/y, a figure clearly lower than anticipated by most forecasts.
Russia’s economy is stagnating and the boost that growth is supposed to get from the launch of the 12 National Projects is still a long way off. Indeed, the administration is still arguing over how to allot the RUB27 trillion of spending. The positive effects of this spending is supposed to increase GDP growth to over 3% by 2021, but the programme has gotten off to a slow start and the in meantime growth continues to slow.
Chief economist of BCS Global Markets Vladimir Tikhomirov attributed the 1Q19 underperformance to Vedomosti to three factors: weak consumption as consumers had to absorb the pension age increase and higher taxes, as well as much more unpredictable warmer winters that lower utilities output, and slower growth of state military orders.
Tikhomirov warns that as state investment has de-facto remained the main driver of economic growth, the national projects could fail to accelerate GDP this year as there are no signs that the large projects are close to being launched.
At the end of 2018, the Central Bank of Russia forecast growth in the range of 1–1.5 % for 2019 and that now looks optimistic, while the responses of analysts interviewed by Bloomberg averaged 1.2%. Even Russia’s economic development ministry, which has updated its forecast monthly, now only expects 0.8 % growth this year. The Russian economy last grew as slowly in the fourth quarter of 2017. The slowdown in growth from 4Q18 (2.7 %) was, however, expected due to low growth in domestic demand.
Growth was negatively affected by the introduction of value-added tax increase in January, which appears to have boosted wholesale trade at the end of last year in anticipation of higher VAT rates. The falling off this trade after the tax was introduced is one of the contributing factors to the sharp slow down and so is considered a temporary affect.
Wholesale activity in the first quarter of this year contracted by 7.4% y/y, even as retail sales rose by 1.8%. Besides the larger-than-expected impact from the VAT hike, observers also point to weak economic development relative to previous years due to a reduction in defence materials orders and a milder-than-usual winter that reduced energy consumption and gas exports.
Inflation (5.3%) is also above the Central Bank of Russia (CBR) target level of 4%, but the VAT’s impact on inflation seems to be milder than expected and coupled with a sharp slow down in industrial production in March analysts are expecting the CBR to cut rates sooner than anticipated in June that will lift growth again in the second half of this year.
However, incomes are still stagnant and that is holding back consumption, which is one of Russia’s three big growth drivers. But the mood of the population has improved mildly as expectations for inflation amongst the population are falling from over 9% and converging slowly with the real rate of inflation. This should support consumption in the second half of the year and will also make it easier for the CBR to cut rates. Rosstat estimates that real incomes fell by 2.3% y/y in the first quarter, while industrial output rose by 2.1% and is forecast to end the year at 2.3% -- a decent, if unexciting, result.
All-in-all the first quarter produced mixed results and the introduction of the new VAT rate produced some distortions to the economy that are expected to wear off relatively quickly. The CBR and the business press believe the growth slowdown is temporary. In the most hopeful scenarios, the launch of large state investments in national infrastructure, healthcare and education at the end of the year will spur higher economic growth next year.
Politically president Vladimir Putin is getting frustrated with the slow pace of implementation of the national projects and chewed out deputies on live TV. The introduction of the programme is an existential issue for the president who saw his trust rating fall to an all time low of 31% in May, down from over 75% a few years ago – its lowest level ever. Putin’s approval rating remains over 60%, but the falling trust rating implies that the national projects must be made to work or the Kremlin will face growing levels of social unrest. It also suggests that while the people to keep Putin in power for now, when his term ends they want a new president.
The external trade balance remains positive and Russia continues to run a triple surplus of trade, currently account and federal budget. After finishing last year with a whopping 2.7% federal budget surplus, Russia is on course to run a 2% budget surplus this year as well.
The trade balance remains positive but was under a bit more pressure in the first quarter. Russian customs reports that Russia’s goods exports, measured in dollar terms, rose a mere 1.4% y/y in the first quarter of this year versus a gain of 25% in the same period in 2018. The dollar value of goods imports fell by 2.4% (up 4% in 2018).
Ruble weakness has depressed Russian spending on imports, which has boosted the current account surplus, but is not in itself a healthy way to increase the surplus. Part of this poor picture for Russian import developments stems from the use of the dollar as a unit of measurement. Measured in euros, goods imports to Russia rose over 5% and about half of Russia’s imports comes from Europe.
The volume of exported crude oil increased by 7% y/y (compared to 3% growth in 2018), while the volume of oil products shipped fell by 7% (exports were virtually flat in 2018). Oil exports will be hit by the contamination of millions of barrels of oil with chlorine that has disrupted the entire supply chain. The disaster will rumble on for months and is already estimated to have cost Russia over $1bn in damages.
Growth in natural gas exports stopped, but exports of liquefied natural gas (LNG) continued to rise. The value of energy exports overall increased by 3.6%.
Turkey on August 18 introduced another shock rate cut. The USD/Turkish lira (TRY) pair, which had been testing the 18-level for around a month, crashed through the 18/$ threshold towards 18.15.
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