Russian GDP shrinks in Q3 but contraction pace not as deep as expected; growth may turn positive in Q4

Russia’s real GDP growth shrank in the third quarter on a year-on-year basis; however, the pace of contraction was not as deep as was projected by several analysts. Yesterday, the third quarter data was released, which showed that the nation’s economy shrank 0.4 percent year-on-year. But the reading was less negative than the projections made by analysts, which gives additional evidence that Russia’s economy is bottoming after its deep recession in the past two years.

The year-on-year economic growth rate of Russia is expected to turn positive again in the fourth quarter and remain positive throughout next year, said Wells Fargo in a research note. A breakdown of the GDP data into its underlying demand component is unavailable; however, the monthly data could give some information on the stabilizing economy of Russia.

For example, the trade balance of Russia expanded to USD 7.4 billion in September from USD 4.9 billion in August as values of both import and export surpassed consensus expectations. Relatively higher oil prices in the third quarter, as compared to the earlier quarter, assisted in stimulating the total exports’ value.

As inflationary pressures continue to subside, real wages are expected to bolter further into positive territory, according to Wells Fargo. Real wages are starting to indicate signs of stability. As inflation has lowered, interest rates have also come down, which are likely to underpin investment spending and overall growth.

The Central Bank of Russia has cut its main policy rate from a high of 17 percent in early 2015 to 10.5 percent now. Similarly, the real retail consumer sales are indicating signs of bottoming, which is a positive sign from the consumer.

But, in spite of signs that indicate towards bright days, worries regarding currency pose risks that might hinder the Russian growth. For example, even if the Russian ruble has shown indications if stabilization in the last few quarters, the RUB has experienced some recent weakness, mostly due to the continued strength of the dollar throughout the board.

Additional softness of the ruble might spur inflationary pressures again that might be a drag on real wage gains. If inflationary pressures return because of a weakening ruble, the Central Bank of Russia might adjust its policy and hike rates, which would not be an encouraging scenario for business investment, said Wells Fargo.

In spite of the potential for renewed ruble weakness and inflationary worries, the Russian economy is expected to rebound in the quarters ahead.