- Russia’s June industrial activity fell 12.1% y/y, but was up 4.5% m/m (nonseasonally adjusted). The number was better than expected and suggests that the industrial sector is beginning to stabilise as suggested by the recent rise in PMIs. However, the recovery is expected to materialise only gradually.
The Russian manufacturing sector has been one of the hardest hit in the Central and Eastern European region, as the massive fall in oil prices has taken its toll on activity amid much tighter liquidity. It will take a while before the industrial sector re-emerges, but the newly released data bring some good news.
Today’s data suggest that industrial activity is beginning to stabilise from a record-high year-on-year drop in May (-17.1% y/y). However, the non-seasonally adjusted 4.5% monthly rise in activity overestimates the seasonally adjusted number, which shows a 0.8% m/m rise according to Economy Minister Elvira Nabiullina.
We expect that the economic recession will gradually abate in the coming quarters. While the first half of 2009 is expected to show a drop in GDP of around 10-11%, we expect minus 8.0% for the whole of 2009. In 2010 we expect moderately positive growth at around 0.5% y/y.
However, risks are still large and public finances cannot be used as extensively to support the economy in 2010 as they are this year, when we expect the fiscal deficit to reach 10% of GDP. Today Russian deputy economy minister Andrei Klepach said there is currently no scope for cutting VAT rates and that it is unlikely that the oil export duty will be scrapped – even in the medium term. These are indications of the fiscal constraints the Russian government is facing. Based on the large fiscal deficit, Russia considers to borrow as much as USD 20bn annually on international markets in 2010-2012 to support the budget without using all public reserves.
