Page 5 - RusRPTJun19

1.0 Executive summary
Preliminary Rosstat figures show Russian GDP growth in the first three months of the year was just 0.5% y/y, a figure clearly lower than anticipated by most forecasts.
Russia’s economy is stagnating and the boost that growth is supposed to get from the launch of the 12 National Projects is still a long way off. Indeed, the administration is still arguing over how to allot the RUB27 trillion of spending. The positive effects of this spending is supposed to increase GDP growth to over 3% by 2021, but the programme has gotten off to a slow start and the in meantime growth continues to slow.
Chief economist of BCS Global Markets Vladimir Tikhomirov attributed the 1Q19 underperformance to Vedomosti to three factors: weak consumption as consumers had to absorb the pension age increase and higher taxes, as well as much more unpredictable warmer winters that lower utilities output, and slower growth of state military orders.
Tikhomirov warns that as state investment has de-facto remained the main driver of economic growth, the national projects could fail to accelerate GDP this year as there are no signs that the large projects are close to being launched.
At the end of 2018, the Central Bank of Russia forecast growth in the range of 1–1.5 % for 2019 and that now looks optimistic, while the responses of analysts interviewed by Bloomberg averaged 1.2%. Even Russia’s economic development ministry, which has updated its forecast monthly, now only expects 0.8 % growth this year. The Russian economy last grew as slowly in the fourth quarter of 2017. The slowdown in growth from 4Q18 (2.7 %) was, however, expected due to low growth in domestic demand.
Growth was negatively affected by the introduction of value-added tax increase in January, which appears to have boosted wholesale trade at the end of last year in anticipation of higher VAT rates. The falling off this trade after the tax was introduced is one of the contributing factors to the sharp slow down and so is considered a temporary affect.
Wholesale activity in the first quarter of this year contracted by 7.4% y/y,
even as retail sales rose by 1.8%. Besides the larger-than-expected impact from the VAT hike, observers also point to weak economic development relative to previous years due to a reduction in defence materials orders and a milder-than-usual winter that reduced energy consumption and gas exports.
Inflation (5.3%) is also above the Central Bank of Russia (CBR) target level of 4%, but the VAT’s impact on inflation seems to be milder than expected and coupled with a sharp slow down in industrial production in March analysts are expecting the CBR to cut rates sooner than anticipated in June that will lift growth again in the second half of this year.
However, incomes are still stagnant and that is holding back consumption, which is one of Russia’s three big growth drivers. But the mood of the population has improved mildly as expectations for inflation amongst the population are falling from over 9% and converging slowly with the real rate of
5 RUSSIA Country Report June 2019 www.intellinews.com