Russian economic contraction to be less severe this year

The Central Bank of Russia, during its September meeting, had argued for additional sentiment in its inflation target of 4 percent from some cabinet members and the market, by giving clearer guidance. In spite of the ongoing progress on controlling inflation and steadying financial conditions, the restrictive monetary policy has reached a point at which the economy’s structural deficiencies would begin to hurt the monetary attempts, stated Societe Generale in a research note.

However, there is a heightened requirement for the fiscal and social agents to coordinate properly to curtail the population’s increased inflation expectations, some other market inefficiencies and call for lavish indexation of social and public sector spending. The Finance Minister would be coming up with a new budget rule, which would depend on counter-inflation measures and urge bringing down the deficit to 1 percent of GDP by 2019, noted Societe Generale.

The Russian central bank might begin providing certain credit concessions to the economy by 2017, given the possible cost of fiscal tightening bias for the Russian economy and a promise for its strict implementation.

“We are lifting our projected trajectory for the main rate in the near future by 50bp, with a target of 8.5 percent by the end of 2017 (vs SGe previous call for 8.0 percent). Moreover, we assume a decrease in the easing moves from the current 50bp to 25bp, to be implemented in 2H17”, added Societe Generale.

The Russian economy is expected to contract 0.7 percent year-on-year this year, as compared with the previous projection of -1 percent. The upgrade of the projection is due to a solid production recovery in the first half of 2016. However, domestic demand continues to weigh on the economic growth and hence the economy is unlikely to see a rapid recovery in growth next year. It might expand by 0.4 percent year-on-year, according to Societe Generale.

Consumer inflation continues to be pushed down by demand-pull factors, though they are not solid enough to decelerate inflation to the target level set by the central bank unless the finance minister implements credible austerity measures.

“In particular, the main risk remains core inflation (6.8 percent yoy in 4Q16, 5.4 percent yoy in 4Q17), which will keep the CPI rate at 6.0 percent yoy in 4Q16 and 5.4 percent in 4Q17”, added Societe Generale.