Russian economy grows sharply in Q2 but may slow down in H2 – Nordea Bank

In the second quarter of this year, the Russian economic growth accelerated sharply, owing to a positive basic industries performance. But several factors might slow down economic activity in the second half of this year, noted Nordea Bank in a research report.

Russia’s GDP growth accelerated noticeably to 2.5 percent year-on-year in the June quarter from first quarter’s growth of 0.5 percent year-on-year. This is the highest pace recorded since the fourth quarter of 2013. Buoyant basic industries output data published before the official GDP figures implied a solid GDP acceleration in the second quarter.

Basic industries are performing better than the overall GDP in 2016-2017 while it was vice versa in 2012-2015. This is because services, notably finance, real estate operations, healthcare, public administration and education are currently lagging behind basic industries in terms of rebound. This trend is partially a consequence of budget consolidation, as healthcare and education spending declined by 20 percent and 15 percent, respectively, in real terms during 2012-2016.

Furthermore, financial sector growth rates are significantly lower than in 2012-2013. Sluggish financial sector performance reflects comparatively subdued lending activity. Overall, the current quite elevated GDP growth rates are mostly due to promising basic industries output dynamics. But the latter might face certain setbacks in the quarters ahead. Agricultural sector might end the year in red because of a poorer harvest due to unfavourable weather.

“According to our estimates, the negative contribution of the agricultural sector to GDP growth in 2017 because of poor harvest may total -0.2 percentage point”, added Nordea Bank.

Industrial production figures disappointed in July. The slowdown was widespread. Industrial production especially manufacturing growth, continues to be pretty volatile, hinting that the rebound is not yet very sustainable.

The OPEC+ deal impact would be visible beginning from the third quarter. Russian cuts commitments were fixed relative to record-high extraction levels in October 2016; as a result Russia was still registering oil extraction rises year-on-year in January-July 2017.

The Russian Ministry of Energy forecasts that oil extraction in the country would reach 547 million tons this year. Given that in the January to July period oil extraction growth reached 1.4 percent, it is forecasted to become negative during some of the remainder months until the end of 2017.

According to Nordea Bank, the Russian economy is expected to grow 1.6 percent in the whole of 2017 despite very favourable second quarter dynamics.

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest