Q2 GDP Data Suggest Russian Economy is Bottoming

Real GDP in Russia fell on a year-ago basis in Q2, but the rate of contraction was not as deep as most analysts had expected. We look for GDP growth to turn positive again in coming quarters.

Real GDP Should Start to Grow Again in Coming Quarters

Data released today showed that real GDP in Russia fell 0.6 percent on a year-ago basis in Q2-2016 (top chart). Not only was the year-over-year rate of contraction in the second quarter not as deep as the consensus forecast had anticipated, but the outturn suggests that the Russian economy is starting to bottom out following its deep recession during the past few quarters. Indeed, we look for the year-over-year rate of real GDP growth in Russia to turn positive again in the current quarter and throughout 2017.

A breakdown of the GDP data into its underlying demand components will not available until next month, but monthly data provide some clues behind the apparent stabilization in the Russian economy. For starters, monthly data show that the volume of the country’s crude oil exports was up 6 percent in the first six months of the year relative to the same period in 2015. In addition, the real effective exchange rate of the Russian ruble (i.e., the inflation-adjusted value of the Russian currency) has tumbled about 25 percent over the past two years (middle chart). This improvement in the international price competitiveness of Russian-made goods and services should help to boost growth in Russian non-energy exports.

Additionally, the CPI inflation rate has receded markedly in recent months (bottom chart). This drop in inflation has had two effects. First, real income (i.e., purchasing power of consumers), which was eroded significantly when the inflation rate shot up, has largely stabilized. Consequently, the plunge in retail spending appears to be coming to an end. Second, the drop in inflation has allowed the central bank to slash its main policy rate from a high of 17.00 percent in early 2015 to 10.50 percent today, and most analysts look for further easing in coming quarters. Lower interest rates should help to support investment spending, everything else equal. In that regard, real investment spending in Russia nosedived nearly 8 percent in 2015. It will be interesting to see whether investment spending is starting to stabilize when the disaggregated GDP accounts are released next month.

As noted above, we look for the Russian economy to recover in coming quarters. That said, the 1.7 percent GDP growth rate that we project for 2017 is a long way from the 7 percent to 8 percent growth rates that characterized the middle years of the past decade. Robust growth during that period was driven primarily by strong investment in Russia’s energy industry. With depressed energy prices today, it is difficult to envision a return to those supercharged growth rates. Moreover, our currency strategy team looks for the ruble to weaken modestly and gradually versus the U.S. dollar in coming quarters as the Russian central bank continues to cut rates while the Federal Reserve slowly removes policy accommodation.

Download the full report