Real economic growth in Russia slowed to 0.7 percent in the third quarter, but still beat expectations for just 0.3 percent growth. Falling oil prices and sanctions should continue to be headwinds going forward.
Nothing to Write Home About
Recently released data show that economic growth in Russia slowed once again in the third quarter to a year-over-year rate of 0.7 percent (top chart). While this outturn beat consensus expectations, it marks another 5-year low since GDP contracted in 2009. The underlying demand components will not be available for another month or so, but continued tension in Ukraine and the recent fall in oil prices seem to be two major headwinds depressing the economy at present.
Monthly data are also pointing to slowing growth. Real retail sales have been decelerating for the past couple years as year-over-year growth looks to have averaged just 1.4 percent in the third quarter, compared to 1.9 percent in the previous quarter. This slowdown in consumer spending growth likely reflects an erosion of real disposable income, which we will subsequently discuss in more detail.
It also seems likely that business fixed investment remains under pressure, as it had already contracted in the first half of this year. One factor that likely is weighing on investment has been the Russian central bank’s tightening of monetary policy. Since February, the central bank has taken its key policy rate up 400 bps to 9.50 percent. While interest rates at such a high level are likely to make investment spending difficult to justify, the recent fall in the ruble leaves the central bank little choice but to leave rates elevated to try to combat weakness in the currency and rising inflation.
Slow Growth Should Persist
A major global theme that is currently having a marked effect on the Russian economy is the tumble in oil prices. This decline has put downward pressure on the value of Russian exports, which are also likely feeling the effects of the persistent slow growth in the Eurozone, as about 20 percent of Russia’s exports are sent there. Another result of recent turmoil due to geopolitical tensions is the precipitous decline in the Russian ruble. The ruble has fallen more than 40 percent this year versus the greenback and more than 10 percent in the past two weeks alone (middle chart). This massive decline is beginning to show through in the form of higher inflation, as CPI inflation reached 8.3 percent year-over-year in October, the highest reading in more than three years (bottom chart). This rise in inflation erodes consumer purchasing power, thereby imposing a headwind on household spending which has already been facing a decelerating trend since the beginning of 2012.
While today’s report of the Q3 GDP figure exceeded expectations, the Russian economy still faces plenty of challenges ahead. Our outlook is for the Russian economy to grow just 0.4 percent for the full year of 2014 and for 2015 as well.
Nothing to Write Home About
Recently released data show that economic growth in Russia slowed once again in the third quarter to a year-over-year rate of 0.7 percent (top chart). While this outturn beat consensus expectations, it marks another 5-year low since GDP contracted in 2009. The underlying demand components will not be available for another month or so, but continued tension in Ukraine and the recent fall in oil prices seem to be two major headwinds depressing the economy at present.
Monthly data are also pointing to slowing growth. Real retail sales have been decelerating for the past couple years as year-over-year growth looks to have averaged just 1.4 percent in the third quarter, compared to 1.9 percent in the previous quarter. This slowdown in consumer spending growth likely reflects an erosion of real disposable income, which we will subsequently discuss in more detail.
It also seems likely that business fixed investment remains under pressure, as it had already contracted in the first half of this year. One factor that likely is weighing on investment has been the Russian central bank’s tightening of monetary policy. Since February, the central bank has taken its key policy rate up 400 bps to 9.50 percent. While interest rates at such a high level are likely to make investment spending difficult to justify, the recent fall in the ruble leaves the central bank little choice but to leave rates elevated to try to combat weakness in the currency and rising inflation.
Slow Growth Should Persist
A major global theme that is currently having a marked effect on the Russian economy is the tumble in oil prices. This decline has put downward pressure on the value of Russian exports, which are also likely feeling the effects of the persistent slow growth in the Eurozone, as about 20 percent of Russia’s exports are sent there. Another result of recent turmoil due to geopolitical tensions is the precipitous decline in the Russian ruble. The ruble has fallen more than 40 percent this year versus the greenback and more than 10 percent in the past two weeks alone (middle chart). This massive decline is beginning to show through in the form of higher inflation, as CPI inflation reached 8.3 percent year-over-year in October, the highest reading in more than three years (bottom chart). This rise in inflation erodes consumer purchasing power, thereby imposing a headwind on household spending which has already been facing a decelerating trend since the beginning of 2012.
While today’s report of the Q3 GDP figure exceeded expectations, the Russian economy still faces plenty of challenges ahead. Our outlook is for the Russian economy to grow just 0.4 percent for the full year of 2014 and for 2015 as well.
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