Page 41 - RusRPTNov21

factors, which, however, are mostly one-offs.
First, the rise in energy prices has strongly buoyed the industry,
especially its extractive sector. This was further supported by higher production quotas from OPEC+. In September, industrial output accelerated to 6.8% y/y from 4.6% in August; the extractive industry was growing at a faster pace (9.5% y/y). The situation in the global energy market will ensure a positive trend in the Russian economy and foreign trade in October, and possibly throughout 4Q21.
Second, the expected cooling of consumer demand has been kicked down the road due to additional social payments from the state, which were distributed in early September. The acceleration of inflation in Russia also had a positive, albeit temporary, impact on demand – the rise in price tags prompted many buyers to accelerate purchases. The trend was further strengthened by growing expectations of imminent policy tightening by the CBR and, as a result, higher cost of borrowing. According to the Rosstat monthly report, in September, retail turnover was up 5.6% y/y – slightly higher than in July-August (5.1-5.3% y/y); paid services to the population increased 14.2% y/y, while in the previous month the growth was more than 17.2% y/y. According to Rosstat, in 3Q21, real disposable income accelerated from 7.4% in 2Q21 to the highest since 2010 of 8.1% y/y.
Third, after a slight decline in 1H21 in the volume of government contracts, especially in the defense sector, this item started to grow in 3Q21, which immediately affected output in the manufacturing industry.
However, recent macro data have also revealed a number of worrying trends. For instance, agriculture, a key growth driver in 2020, this year became one of the laggards due to the weaker harvest. According to Rosstat, in September, the volume of agricultural production in Russia continued to decline – in August, output fell 10.8% y/y, while in September the decline deepened to -5.8% y/y. A slowdown was also seen in the construction sectors (in September, the volume of construction increased by a meager 0.1% y/y vs +6.2% in August) and transport freight turnover (+5.1% y/y in September vs +6% in August and 9.3% in July).
Basic sector output growth slowed to 4.4% y/y in September, down from 7.1% in July and 4.8% in August. After seasonal adjustment, m/m growth in September was just 0.5%, not enough to fully offset the 0.7% decline in August. This meant that basic sector output growth came in at 5.4% y/y in 3Q21, down rather sharply from 13.5% in 2Q21, the quarter when overall economic output moved past the pre-Covid level and the gap in potential output, which emerged in 2Q20 during the lockdown and consequent sharp correction in economic activity, closed in most industries (excluding entertainment). The closing of the output gap in the previous quarter was one of the main reasons for the slowdown in basic sector output growth in 3Q21. The other main reason was a 6.2% y/y drop in agricultural output.
With the slowdown in 3Q21, economic activity in the quarter was only slightly above the 2Q21 level. In 4Q21, we expect economic output to be virtually flat relative to the 3Q21 level, although we anticipate growth in the energy segment thanks to increased gas exports and the ease in the OPEC+ quota.
41 RUSSIA Country Report November 2021 www.intellinews.com