Forecast for Russia

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FRANKFURT, 29 JUNE 2012 - Given the steep rise in oil prices – of 30% in 2010 and 40% in 2011 – Russia’s growth performance has remained a little disappointing compared with some other major emerging market economies. After accelerating to 4.3% in 2010 from a steep contraction in 2009, GDP growth slowed in H1 2011 before picking up somewhat in H2 to give full-year 2011 growth of 4.3%. But the pace slowed again in Q1 this year, with a 4% year-on-year rise in GDP (revised down significantly from an initially-reported 4.9%) implying seasonally adjusted quarterly growth of just 0.1%. The economy probably continued to benefit from fiscal stimulus in Q1, with large pay increases awarded to public sector workers, while consumer purchasing power may have been boosted by an artificially large fall in inflation due to a delay in hikes to regulated utility prices (which normally occur in January but were suspended until July, after the presidential election in March). But the deepening crisis in the Eurozone appears to have weighed more heavily than expected on activity at the start of this year.

The problems in the Eurozone will continue to dampen the Russian economy through 2102, curbing exports, FDI and other capital inflows, and the impact will be exacerbated by the recent fall in oil prices, which are now expected to decline by about 5% this year on average. Industrial production disappointed in both March and April, with the more externally exposed sectors of the economy struggling as a result of the mounting weakness in global demand. Growth remains underpinned by the strength of domestic demand, helped by the politically-induced fiscal stimulus measures and a further decline in the unemployment rate to a four-year low of 5.4% in May. But fiscal policy is now probably tightening quite sharply, which will partly offset the ongoing strength of consumer demand.

Our current forecast is for GDP growth of 4% in 2012, but the surprise downward revision to the Q1 result means that an outturn in a 3.5-4% range may now be increasingly likely. But despite lower government spending, domestic demand is expected to remain fairly robust. Investment growth was less marked in both March and April, but the fundamentals remain solid; corporate profits are still fairly buoyant and spare capacity is falling. Moreover, lending to non-financial corporations rose 26% on the year in February, suggesting that demand for finance remains healthy. So we expect the slowdown in investment to be relatively modest. The fundamental drivers of consumer spending are likely to remain solid, with tightness in the labour market keeping earnings growth at a high level, although real purchasing power will be eroded in H2 this year by stronger inflationary pressures. And although interest rates have remained on hold this year, the recent fall in inflation implies that real monetary conditions have tightened significantly. Moreover, despite some concerns about liquidity shortages, central bank rhetoric has remained mainly hawkish, aware of possible upside risks to this year’s inflation target of 5-6%. As a result, the likelihood of higher interest rates in H2 to avert rising inflation next year may also dampen demand later this year and heading into 2013.

With the rather weaker prospects now seen for Germany and Scandinavia and slower growth expected for the rest of Europe in the next few years, Russia’s growth prospects have also deteriorated. And with the world oil price forecast to fall further in 2013 as weaker global demand more than offsets production concerns in the Middle East, this will add to the constraint on public spending and weigh increasingly heavily on investment and business and consumer confidence. As a result, with the boost from high oil revenues and high state spending continuing to fade, GDP growth is now forecast to slow to about 3% in 2013, before picking up modestly to about 4% in 2014. Over the longer term, the prospect of stable real energy prices and continued subdued demand in Europe overall, the main market for Russia’s oil and gas, still make it very unlikely that growth will return to the levels of 7% or higher that were seen in 2003-07.

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