Russia's economy slowed more than forecast despite oil rally

By Anna Andrianova on 11/13/2017

(Bloomberg) -- Russia’s economy slowed more than forecast despite a bull-market rally in oil, its chief export, ending three quarters of accelerating growth that followed the country’s worst recession this century.

Gross domestic product added an annual 1.8% in the third quarter, down from 2.5% in the previous three months, the Federal Statistics Service said on Monday, citing preliminary data. That missed a median estimate of 2% in a Bloomberg survey of 19 analysts. The Economy Ministry forecast an increase of 2.2% in the period.

Despite a government vision of an economy remade by the crash in energy prices and a currency crisis that followed, Russia is increasingly resembling its old self as consumer demand comes to the fore. Expansion is falling back to the limit of what the central bank believes the economy can accomplish, with gains in GDP forecast to lose more momentum and slow slightly every quarter next year.

“This pace looks sustainable, but that’s just the problem,” said Scott Johnson, an economist with Bloomberg. “Russia could be stuck in a low gear without some combination of good luck and good policy.”

The ruble, which gained 2.5% last quarter against the dollar, briefly extended losses after the data release and traded 0.5% weaker at 59.4950 versus the U.S. currency as of 4:19 p.m. in Moscow.

Although slow to recover after incomes collapsed, household spending jumped 4.3% in the second quarter from a year earlier, still lagging behind a 6.3% increase in investment. But  consumer confidence is now improving thanks to more than a year of gains in real wages, a stronger ruble and an unprecedented decline in inflation. Retail sales are on the rise after a record contraction of 27 months ended last April.

Even with the rebound in crude, net exports have been a drag after a spike in import growth. Bank of Russia Governor Elvira Nabiullina has warned that, without overhauling the economy, not even oil at $100/bbl would lift medium-term gains in GDP beyond a range of 1.5% to 2%. Global benchmark Brent crude surged 20 percent in the third quarter, a run that’s continued and pushed it over $60 last month.

Policy, demographics

Considering Russia’s “conservative” monetary and fiscal policy, and its demographic struggles, the recent pace of expansion in the economy isn’t “very low,” said Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow. A decline in the working-age population by 1% every year is possibly shaving 1% off economic growth, according to Kouzmin.

“Risks for growth are very moderate,” he said. “There’s indeed some slowdown in annual growth rates, but that’s mostly related to base effects.”

President Vladimir Putin is growing impatient as he approaches what may be his final term in the Kremlin. In an unusual remark on monetary policy last week, he said Russia’s strong economic fundamentals, including inflation at a record low, warrant further cuts in interest rates.

The central bank has been stingy with policy easing, cautioning that its sway over economic growth is limited as it focuses on keeping inflation in check. Still, it’s delivered five rate cuts so far this year and said in October for the first time that it’s preparing to abandon its “moderately tight” stance in favor of neutral monetary policy.

The head of the Bank of Russia’s monetary-policy department, Igor Dmitriev, has signaled rate setters may begin to look beyond price growth in charting the way forward.

“Experience is leading us to flexible inflation targeting,” Dmitriev, who reports directly to Nabiullina, said at a round-table in Moscow last Thursday. “The widest possible spectrum of indicators deserves a look in making decisions. That includes economic growth and the situation in the labor market.”


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