Russian economy likely to contract this year, expand next

The affirmed preliminary data of Russia’s second quarter GDP growth showed that the economy contracted 0.6 percent year-on-year, as compared with a 1.2 percent contraction in the first quarter. According to the details published, the agricultural sector grew 2 percent annually, while manufacturing, mining and quarrying rose 0.3 percent year-on-year. On the other hand construction contracted 9.5 percent annually, whereas wholesale and retail declined 1.2 percent.

The preliminary seasonally adjusted data for the month of August indicated that the Russian economy grew 0.3 percent sequentially, the first growth since September 2015. The economy is expected to shrink 0.6 percent year-on-year for the whole of 2016, given the Brent year average of USD 48.6/bl, noted Danske Bank in a research report. For the next year, Russia’s GDP is expected to expand 1.2 percent, added Danske Bank.

S&P, in September, upgraded Russia’s sovereign credit rating outlook to ‘stable’ from ‘negative’, as external risks have waned and it projects economic to expand in years ahead. Meanwhile, Russian economy’s demand side continues to be in negative territory, whereas real wage growth remains unsustainable in spite of low unemployment and ongoing disinflation. Consumer demand is expected to turn positive at the end of fourth quarter of 2016 and early 2017, said Danske Bank.

Meanwhile, the Central Bank of Russia had lowered its key interest rate in September by 50 basis points to 10 percent, consistent with consensus projection. However, in contrast to market pricing and economists’ anticipation, the central bank’s statement highlighted that the present key rate requires to be kept on hold till the end of this year with the likelihood of a reduction in the first or the second quarter of 2017. Therefore, the next window for the central bank to lower its rate is likely to be by the end of first quarter of 2017. As of 12 September, Russia’s inflation has slowed to 6.6 percent year-on-year from 9.8 percent in January.

“Given a stabilisation in crude prices and balanced RUB exchange rate, our model signals that CPI will decline by under 6.0 percent y/y in December 2016”, added Danske Bank.