Page 48 - RusRPTSept23

Russia’s economy is likely to have had a very strong second quarter as industrial production and retail sales rose sharply in Q2 (both by more than 3.0% q/q). But the activity data for June suggest that a lot of the momentum in industry started to fade towards the end of the quarter and Capital Economics thinks that growth is likely to slow sharply in the second half of the year.
Retail sales data for June showed that growth rose from 9.3% y/y in May to 10.0% y/y. This was above the consensus of 9.5% y/y. Capital Economics estimates that this is consistent with an increase of 0.5-1.0% in SA m/m terms and 3.0% in q/q terms in Q2.
Consumer spending has bounced back this year, buoyed by the strength of the labour market (including a recovery in households’ real incomes) as well as growth in government spending (including social spending).
Meanwhile, industrial production figures for June showed that growth edged down from 7.1% y/y in May to 6.5% y/y. Mining output contracted by 1.7% y/y while manufacturing hit a two-year high of 13.1% y/y. In Q2 as a whole, industrial production expanded by 3.3% q/q, the fastest pace since Q2 2021. This was due to import substitution as well as a boost to military-orientated sectors as a result of higher government spending on the war effort.
That said, there are now growing signs that industrial activity is softening. Manufacturing output rose by 0.2% in SA m/m terms in June, the slowest pace in six months. Russia’s manufacturing PMI in July also edged lower from recent multi-year highs.
Russia’s economy had a much stronger first half of the year than expected and Q2 GDP growth could now come in at 4.0-4.5% y/y (vs. Capital Economics current forecast of 3.0-3.5%). Our 2023 GDP growth forecast of 1.3% is likely to be achieved relatively easily. That said, a lot of this growth has been front-loaded and will come at the expense of growth further down the line. What’s more, capacity constraints have increased and inflation risks are intensifying. The central bank is likely to hike interest rates further (from 8.50% now to 10.0% early next year).
Share of manufacturing sectors in Russia’s GDP to surpass 15% by 2035
the government said on August 23. It is noted that production volumes are to gain 4% on average each year through 2035 according to the strategy
RUSSIA Country Report September 2023 www.intellinews.com