Schroders Quickview: Russian growth surprise fails to brighten outlook

Despite a stronger than anticipated finish to 2014 for Russia’s economy, we expect a significant contraction in GDP over 2015.


Craig Botham

Craig Botham

Emerging Markets Economist

First quarter data in 2015 has been poor. Inflation continues to climb (now running at almost 17%) whilst industrial production and PMIs show activity to be weak everywhere.

Disposable income has also been contracting, making continued support from consumption a very unlikely prospect, leaving the outlook for the Russian economy bleak despite an upbeat finish to 2014.

Insipid Q4 growth fails to inspire

The Russian economy put in a better than expected performance in the final quarter of 2014, with GDP growing 0.4% year-on-year against consensus expectations of 0% growth.

The Q4 growth was lower than the upwardly-revised previous quarter’s 0.9% growth, but a weaker number had been expected given the somewhat calamitous collapse of oil in the closing weeks of 2014. Growth for the year overall came in at 0.6%.

Households fail to provide home comfort

Looking at an expenditure breakdown of the GDP data, what growth there was came entirely from household consumption, which managed to expand 1% year on year, up from 0.2% the previous quarter.

Government spending and investment both contracted, as did exports. This matches some anecdotal evidence that consumers have been frontloading consumption thanks to high inflation, which is clearly not a sustainable growth path.

On a sector basis, growth was recorded in just a handful of areas. Manufacturing barely managed to expand, growing 0.6% year on year, continuing the slowdown seen throughout 2014.

PMI numbers in the first quarter of this year suggest a more negative set of figures will be the norm this year.

Reversal of fortune remains unlikely

Needless to say, the fourth quarter’s surprise has not made us any more positive on the outlook for 2015.

Barring a complete political reversal and removal of sanctions, or strong recovery in the price of oil, prepare for a significant contraction of activity this year.