Russian economy to record positive growth next year, appreciating RUB likely to support consumer demand

In the September quarter, Russia’s economic growth contracted on a year-on-year basis by 0.4 percent as compared with the contraction of 0.6 percent year-on-year in the prior quarter. For the initial nine months of this year, the Russian economy shrank 2.6 percent year-on-year. A similar trend was seen in mining and quarrying.

The negative data for the third data came from construction, manufacturing and retail and wholesale, which recorded a contraction of 2.9 percent, 1.2 percent and 3 percent respectively. Preliminary seasonally adjusted data for October indicated that the economic growth came in at 0.0 percent on a sequential basis.

“We keep our GDP growth forecasts at -0.6 percent y/y for 2016 and 1.2 percent y/y for 2017. We expect Russia’s economy to expand 1.4 percent y/y in 2018 on Brent crude staying over USD60/bl, further monetary easing and recovering private consumption”, noted Danske Bank in a research report.

The demand side continues to remain in negative territory, while the real wage growth is coming in slightly above zero. Low unemployment and ongoing disinflation are likely to underpin the private consumer next year. Consumer demand is expected to turn positive in early 2017, assisted by a strengthening Russian ruble.

Meanwhile, the Central Bank of Russia kept its key rate unchanged at 10 percent in December, consistent with consensus expectations. The central bank’s stance is traditionally moderately hawkish. Yet, the governor’s message has been quite clear. The CBR governor Elvira Nabiullina mentioned during the press conference that it might lower the key rate in the second quarter of 2017.

Inflation decelerated to 5.6 percent as of 12 December 2016 from 6.1 percent year-on-year in October. Given that the crude prices are stabilizing and also that the RUB exchange rate is balanced, the CBR might attain its 4 percent year-on-year inflation target by the end of next year, which would permit a gradual reduction in the key rate to 7 percent by December 2017, added Danske Bank.

“We continue to be moderately bullish on the RUB in the short, mid- and long term, as it has been supported significantly by the pledge of the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC economies to cut oil production, while the Fed’s hawkish stance is restraining the RUB’s excessive rally”, stated Danske Bank.