150922 russia watch

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Group Economics Emerging Market Research

Russia Watch

Peter de Bruin +31 20 3435619

Has the recession ended?

22 September 2015 

There are some tentative signs that the economy has bottomed out, despite the PMI’s remaining below the 50-mark

This would suggest that the recession is about to end, though growth prospects remain poor

Indeed, renewed ruble weakness has rekindled inflation which will further erode households’ purchasing power

The CBR needs to find a balance between high inflation and a weak economy, but will soon start to loosen again

Recovery

in

consumption

suggests

economy

has

falling to 47.9, from 48.3 the month before. This kept the index

bottomed out…

below the boom-bust mark for ninth month in a row, though it

Data for August show some tentative signs that the economy

is worth bearing in mind that the relationship between the

has found a bottom. Real retail sales fell by 9.1% compared to

actual industrial production figures and the manufacturing PMI

a year ago. This marked the sixth month in a row that retail

has weakened lately. Still, the services PMI also slipped back

sales contracted by around 9%. This suggests that the series

below the 50-mark. The upshot is that the data are currently

is finding a bottom. Indeed, when we correct for seasonal

painting a bit of a mixed picture, though our feeling is that the

influences, real retail sales have started to grow modestly

economy is about to bottom out.

since June. What is more, vehicle sales declined by -19% in August. That is still a very deep drop, but much less severe

Lower oil prices pose a risk,..

than the -42.5% fall that was recorded in March of this year.

The ongoing weakness in oil prices, however, does pose risks

And again, the series is showing an upside trend, when we

and could somewhat delay the moment that the economy will

correct for seasonal patterns.

start to recover. About three fourths of Russia’s exports consist of energy products and lower oil prices will therefore weigh on

Signs that the economy is bottoming out %yoy

the country’s growth outlook. %yoy

25

150

Lower ruble has pushed up inflation again

20

120

%yoy

15

90

100

18

10

60 30

80

16

5 0

0

60

-5

-30

40

-10

-60

-15

-90 07

08 09 10 11 Real retail sales (lhs)

12

13 14 15 Light vehicle sales (rhs)

%yoy

14 12 10

20

8

0

6 4

-20 13 Source: Thomsons Reuters Datastream

Also an improvement in investment

14 Ruble to dollar (lhs)

15 Inflation (rhs)

Source: Thomsons Reuters Datastream

Meanwhile, there are also some tentative signs that investment is improving. Gross fixed investment fell by 8.5% in

…as renewed ruble weakness has pushed up inflation,…

July, but by -6.8% in August. It is still early days, but it seems

In addition, the renewed drop in oil prices has pushed down

that this series has found at bottom too. What is more, the

the ruble. In turn, this has driven up import prices and inflation

declines in industrial production growth have continued to

more generally. It rose from 15.3% in June to 15.6 in July and

moderate. Industrial production decreased by 5.5% in June,

15.8% in August. Judging from the second graph, the drop in

but production was down by 4.3% compared to a year ago in

the ruble will push up inflationary pressures further for at least

August. Still, the improvements partly stem from the low base,

one or two more months. In turn, this will bite deeper into the

while these indicators remain in contraction territory.

budgets of households, firms and the government, risking to delay the recovery.

…though PMI’s have fallen further below the 50-mark Moreover, other data have painted a less encouraging picture. In particular, the manufacturing PMI slipped further in August,


2

Russia Watch – Has the rec cession ended? 22 Septembe er 2015

that was recorde ed in the middlee of April when n the series

…p prompting CBR to stay on hold h The e renewed rise e in inflation alsso prompted the e Central Bankk

tro oughed. The sttabilisation of R Russia’s FX res serves is a

of Russia R (CBR) tto keep its policcy rate at 11% during its

re eflection of the fact that the ecconomy has en ntered calmer

me eeting on the 11 1th of September. The CBR needs to find a

wa aters and that the pace of cappital outflows has h continued to t

balance between rising inflation and the weak economic

re ecede significan ntly (see graphh below). As a result, r the amo ount

bac ckdrop. Until itss September meeting, m helped d by a modest

off foreign money y inflows due too Russia’s currrent account

dro op in inflation, the central bank had loosened d is policy

su urplus is, at the e moment, slighhtly higher than n the outgoing

sha arply, with cum mulative rate red ductions totallin ng 6 percentag ge

ca apital outflows, which explainss the modest accumulation a of

points. But with in nflation on the up u again, the central c bank ha as

FX X reserves.

t predominan nt factor. started to see inflation risks as the

Capital C outflow ws have slow wed significantly CB BR will soon start to loose en policy aga ain

$bn

bps s

90 80 70 60 50 40 30 20 10 0

18 8 16 6 14 4 12 2 10 0 8 6

13 Q1

13Q3

14Q Q1

14Q3

15Q1

4 04

05

06

07

08

09

10

11

12

13

14

15 So ource: Thomsons Reuters Datastreaam

Sou urce: Thomsons R Reuters Datastream m

ecession should soon end,, but recovery y will be weak Re …b but loosening cycle to startt soon again

Ta aken everything together, thee tentative signs of stabilisatio on

How wever, we think that the CBR R will soon startt to ease policyy

that we are curre ently seeing are re happening a bit sooner than

aga ain. Our energyy analyst believves that oil pric ces should

e had expected d. That said, thhe ongoing wea akness in oil we

reb bound modestlyy later this yearr and in the beginning of nextt

prrices will depress the outlook somewhat. Th hese factors willl

yea ar. This suggessts that we are likely to see a modest

prrobably roughly y balance eachh other out. We e therefore leavve

stre engthening of tthe ruble, which should take away a an

ou ur forecasts unchanged and ccontinue to thin nk that the

imp portant factor th hat has been driving d up inflation lately. In

ec conomy, on ave erage, will shri nk by 4% this year, y before

add dition, the weakk economy sho ould act as a de eflationary forcce.

staging a very modest m recoveryy next year. Ho owever, we exp pect

In short, s we contin nue to think tha at inflation, afte er one or two

oY drop in outpput that was rec corded in Q2 will w that the 4.6% Yo

mo ore months of fu urther gains, will w come down in the remaind der

st rate of contraaction and thatt the YoY declines mark the deepes

of the t year and ne ext year. Accorrding to our esttimates, it shou uld

p going forwardd. In QoQ terms, the economyy wiill be less deep

fall to around 12% % in Decemberr, and to 5% at the end of nexxt

started to contra act in the third qquarter of 2014 4, implying a lower

yea ar. What is morre, due to rene ewed softness in oil prices, the e

ba ase of comparison when the 22015 third quarter GDP figure es

cen ntral bank now thinks that the e economy will shrink by 4.2% %

wiill be released. Together withh a slowly impro oving economicc

insttead of 3.2% e estimated earlie er. This implies s that more

picture, this shou uld help YoY ddeclines to mod derate. Howeve er,

mo onetary stimuluss will be neede ed to counterac ct the effects off

the recovery will be weak. Eve n though the unemployment rate u

low wer oil prices. W We therefore exxpect the centrral bank to

as fallen, worke ers are workingg fewer hours, while having to o ha

red duce its key rate, possibly as early as during g its October

co ope with high in nflation. As a reesult, households’ real

me eeting.

pu urchasing powe er has taken a big hit. In addiition, the sa anctions imposed by the EU/U US make it diffficult for firms to o

modest upwarrd trend FX reserves on m

bo orrow externally. Finally, interrest rates are still s high, implying

es eanwhile, it is encouraging to note that Russ sia’s FX reserve Me

that financial con nditions will rem main tight in the foreseeable

hav ve remained on n a modest upw ward trend, des spite the recen nt

ugh we think thhat the CBR will soon start to future, even thou

bou ut of ruble weakness. Indeed, FX reserves totalled t $365bn n

loosen policy again.

in the t beginning o of September, $14bn $ more than the $351bn n


3

Russia Watch – Has the rec cession ended? 22 Septembe er 2015

Ke y forecasts for the t economy off Russia 20 012

2013

20 014

2015e

201 6e

GD DP (% yoy)

3.4

1.3

0 0.6

-4.0

0 0.5

CPI inflation (% yoy)

5.1

6.8

7 7.8

15.0

7 7.0

-0.1

-0.5

-0 0.5

-3.6

-2 2.5

9

10

10

13

15

3.6

1.7

3 3.0

5.0

4 4.0

oss fixed investme ent (% GDP) Gro

21.9

21.8

20 0.6

17.9

17 7.3

Gro oss national savin ngs (% GDP)

28.4

24.5

23 3.5

21.3

20 0.6

USD/RUB (eop)

30.4

32.7

61

60

55

EU R/RUB (eop)

39.4

45.1

73

60

61

dget balance (% GDP) G Bud Govvernment debt (% % GDP) Current account (% GDP) G

dget b alance, curr rrent acc. for 2015 and 2016 are rou unded figures Bud

Source: EIU, ABN AMRO A Group Ecconomics

Find out more ab bout Group Ecconomics at: htttps://insights..abnamro.nl/e en/

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