Slump persists in Q2

RUSSIA ENERGY / FINANCE - Report 04 Jun 2019 by Marcel Salikhov

Preliminary April 2019 monthly data published last week by Rosstat shows that the Russian economy continued to be somewhat depressed in Q2, after a weak Q1 (+0.5% GDP y/y). Based on our GDP nowcast model, we expect some rebound in Q2, to 0.6%-0.8% y/y. We think some one-time factors led to such low growth rates in Q1, and that their effect will gradually dissipate in Q2.

But there are no fundamental factors to support a pickup in 2019. In particular, investment growth (+0.5% y/y in Q1) was nearly stagnant, without any significant push from government-funded infrastructure projects. Real incomes declined 2.3% y/y Q1, and there are no plans to increase pensions or wages in real sectors beyond expected inflation. In Q1, real disposable income was 12% lower than in 2013, and roughly corresponded to 2009 levels.

Based on weekly inflation data, we expect CPI in May to decline to 5.1% y/y, from 5.2% in April. Annual inflation peaked in March, as we expected, and has continued to slide. The quick decline of inflationary pressure is another indicator of weak domestic demand.

It becomes increasingly inevitable that the CBR will cut at its June meeting. We expect a 25 bp cut on June 14th.

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