Page 6 - RusRPTSept19

1.0 Executive summary
Growth picked up slightly in the second quarter of this year to 0.9% from the very soggy 0.5% in the first quarter, which was at the top of the range of predictions, but is, in effect, still a stagnation rate.
The result was anticipated by analysts, who pointed out that the economy’s core sectors were doing better than expected over the summer, but the economy is still spluttering.
The economy is supposed to get a shot in the arm from the RUB27 trillion spending programme on the 12 national projects that is now in effect, but the launch of the programme is off to a very slow start: as of the second quarter only 20% of the planned spending had been disbursed. The responsible ministries and agencies are still struggling to identify the best projects and work out detailed plans on which to start work.
The lacklustre performance is reflected in industrial production, which expanded by 2.8% in July but when adjusted for calendar effects was actually a 0.4% contraction. A similar result was recorded in the IHS Markit Russia Manufacturing Purchasing Index (PMI) result which improved slightly in August to 49.1, but that is still below the 50 no-change mark and represents a contraction.
Having said that, business remains optimistic about the out look for the rest of the year. Unemployment is low and inflations has also been retreating, falling to 4.6% in July. After inflation fell to post Soviet record low of 2.3% last year, it rose at the start of this year to top 5%, spurred by a 2pp hike to VAT to 20%. But the inflationary bump from the tax hike has worn off faster than expected and now the Russian economy is on course to get back to the Central Bank of Russia (CBR) 4% inflation target level by the end of the year.
Falling inflation means the CRR has room to cut rates that will support growth. The central bank has already cut rates once and will cut at least one more time this year if not two.
Growth remains almost entirely driven by consumption and as real incomes growth remains at zero or slightly below the spending is funded by increased consumer borrowing, which has been growing at 25% pa. This has sparked a debate in the government which is divided over how to deal with consumer borrowing, but it likely the CBR will act to head of the appearance of bubble by applying tougher prudential measures on consumer borrowing.
In the meantime the banking sector has returned to clear profit and is making more money than at any time in the last five years. The same is true of corporate profits which are gathering momentum.
Retail has also recovered somewhat thanks to the consumer borrowing, but all the gains have been funded by debt. Online retail, however, continues to boom with the sector growing by over 20% pa. A fight has broken out amongst the leading players who are all seeing sales growing by 60-80% a year, which is likely to continue for several years. E-commerce only accounts for 4.5% of retail turnover at the moment, but will continue to double its share every two years or so for the foreseeable future.
6 RUSSIA Country Report September 2019 www.intellinews.com