Russian macro: the economy is cooling as the growth model requires transformation
GDP statistics suggested that the nation’s seasonally adjusted GDP contracted by 0.6% Q-o-Q in 1Q25. April statistics also failed to impress. However, the economy was seemingly looking up in May. As a technical recession implies negative economic performance for two consecutive quarters, this risk suddenly emerged after unexpectedly strong 4.3% economic growth in 2024. However, a number of other indicators suggest that Russia can avoid a GDP contraction in 2Q25. Household credit, which resumed growth after a series of m-o-m contractions at the end of last year, will likely support domestic demand and offset the more moderate budgetary spending growth expected this year. An excessively strong ruble, which trimmed oil-and-gas revenues, is one of the reasons for such moderation. The ruble appeared too strong amid Russia’s transition toward a greater use of national currencies for foreign trade settlements. Demand for rubles from Russia’s trade partners increased more than Russian importers' demand for foreign currencies, as Russia still enjoys a decent trade surplus.
Moderation of budget expenditure growth will be disinflationary and will open more room for the CBR to act. Generally, amid easing budgetary stimulus, the economy will gradually move toward a more moderate growth trajectory, accompanied by lower inflation. We expect inflation to decline to 7.1%-7.4% this year, and next year it may be close to 5%, i.e., still above the CBR’s inflation target. Hence, the key rate will remain elevated and will likely continue above 10% next year. We expect the economy to grow by 1.9-2.1% this year and 2.2-2.5% in 2026. Obviously, any new, currently unexpected shocks (such as more sanctions) could alter this scenario.
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