2016.05.1805:20:00UTC+00Russia’s Real Gdp Growth to Return to Positive Territory in Q2 2016

On a year-on-year basis, Russia’s real GDP shrank 1.2% in the first quarter, according to the data released recently. Even if the additional working day in the first quarter due to the leap year would have flattened the growth rate in year-on-year terms, the output was not as subdued as consensus expectations. Overall, the Russian economy seems to be starting to flatten out following a contraction in 2015, noted Wells Fargo in a research report. The Russian economic growth is expected to turn positive in H2 2016.

Looking into details, the monthly data implies that the consumer sector might have started stabilizing. Retail sales declined 5.4% y/y in the first quarter following a double digit decline in the second half of 2015. Last year, Russia’s consumer purchasing power dropped after the CPI inflation accelerated noticeably. As inflation has decelerated to “normal” rates, the purchasing power has not been extremely impacted like last year.

A sharp acceleration in inflation in 2015 was partially due to ruble’s sharp decline, combined with the decline in energy’s price. Subdued economic activity has aided in decelerating CPI inflation. Also, the recovery of ruble’s value in the past few months has also helped in easing pressure on inflation.

The Bank of Russia got the leeway to lower its benchmark rate due to the sharp slowdown on inflation. The central bank cut its interest rate to current 11% from 17% in early 2015. According to several analysts, the central bank is likely to further loosen monetary policy in the months to come. Reduced interest rates will aid the economic activity through higher purchases of consumer durable goods, added Wells Fargo.

As mentioned earlier, Russia’s real GDP growth is expected to become positive again in H2 2016; however, the growth rate returning to 5% is unlikely to happen anytime soon. Foreign direct investment in Russia has become subdued due to geopolitical tensions, while lower oil prices have been a drag on energy sector’s production, noted Wells Fargo.