|

Russian Q3 GDP: Continuing the Climb from Deep Recession

Real GDP in Russia fell on a year-ago basis in Q3, 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.

Economic Outturn Suggests Future Growth not Far Ahead

Economic data released this morning showed that Russian GDP in Q3 contracted 0.4 percent from a year ago. However, the reading was less negative than analysts had expected and provides further evidence that the Russian economy is bottoming following its deep recession over the past two years. We look for the year-over-year rate of real GDP growth in Russia to turn positive again in the current quarter and maintain positive growth throughout 2017. Although a breakdown of the GDP data into its underlying demand components is not available at this time, monthly data can provide some color on the stabilizing Russian economy. For instance, Russia’s trade balance in September grew to $7.4 billion from August’s $4.9 billion as both export and import values bested consensus forecast expectations. Relatively high oil prices in Q3, compared to the previous quarter, certainly helped boost the total value of Russian exports.

Taming the Inflationary Beast

As inflationary pressures continue to abate, real wages should strengthen further into positive territory. Real wages, which only recently emerged from negative year-over-year growth rates, are beginning to show signs of stability. As inflation has come down, interest rates have followed suit, which in turn should support investment spending and overall growth, everything else equal. The central bank has slashed its main policy rate from a high of 17.00 percent in early 2015 to 10.50 percent today. Likewise, real retail consumer sales are showing signs of bottoming, an encouraging sign from the consumer.

However, despite signs that point to sunny days, currency concerns pose risks that could impede real Russian growth. For instance, although the Russian ruble has shown signs of stability over the past several quarters, the currency has experienced some recent weakness, primarily a result of the continued strength of the dollar across the board. Further weakness of the ruble could stoke inflationary pressures again, which could weigh on real wage gains. If inflationary pressures return as a result of a weakening ruble, the central bank may adjust its policy and raise rates – certainly not an encouraging scenario for business investment.

Despite the potential for renewed ruble weakness and inflationary concerns, we look for the Russian economy to recover in coming quarters. That said, growth rates of around 1 and 2 percent that we project for 2017 are far from the 7 and 8 percent rates that characterized the middle years of the past decade. With depressed energy prices today, it is difficult to imagine a return to such lofty growth. 

Download the full report

Author

More from Wells Fargo Research Team
Share:

Editor's Picks

EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates

Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold jumps above $5,000 as China's gold buying drives demand

Gold price rises to near $5,035 during the early Asian session on Monday. The precious metal extends its recovery amid a weaker US Dollar and rising demand from central banks. The delayed release of the US employment report for January will be in the spotlight later on Wednesday.

Week ahead: US NFP and CPI data to shake Fed cut bets, Japan election looms

US NFP and CPI data awaited after Warsh’s nomination as Fed chief. Yen traders lock gaze on Sunday’s snap election. UK and Eurozone Q4 GDP data also on the agenda. China CPI and PPI could reveal more weakness in domestic demand.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans. 

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.