Data for Q3 2015 Russian GDP on the expenditure side depict depressed domestic demand

RosStat has published data on GDP by expenditure category for the third quarter of 2015. An earlier release of data on GDP by producing sector had indicated that overall GDP had declined by 4.1% year on year (y/y) in the third quarter of 2015 compared with declines of 2.2% in the first quarter of the year and 4.6% in the second. The new data have confirmed that the decline in GDP was driven by sharp y/y downturns in domestic demand. The decline in private consumption, at 9.3% y/y, was steeper than that in the first half of the year and reflected the developments in real wages and real disposable money income that have been revealed in successive monthly economic reports. Nominal wages and incomes have not kept pace with rapid inflation, propelled by the depreciation of the rouble, as enterprises have face a squeeze on net revenue. While unemployment rates have risen only modestly in recent months, there is a good deal of anecdotal evidence that employers have adapted to the situation by cutting wages and putting workers on part-time status. Public consumption was down y/y in the third quarter of 2015 as well, but only modestly. Although government revenues have suffered as a result of reduced receipts from the oil and gas sector, the depreciation of the rouble has provided some relief in that a given stream of foreign currency revenues provides the federal budget with more rouble income than earlier while the federal government can tap its fiscal reserves to cover deficit spending. On the other hand, a significant number of Russia's regions, facing hard budget constraints, are in difficult budgetary straits and formerly secure government jobs have been eliminated.

Gross capital formation also contracted sharply earlier y/y in the third quarter of 2015. Fixed investment declined by 8.1% y/y as businesses faced rising idle capacity and tight credit conditions. However, the decline in total gross capital formation in the third quarter of 2015 came in at 18.1%, implying a very steep decline in inventory accumulation, although not as dramatic as registered in the second quarter. The decline in inventory accumulation reflected anticipated trends in demand as well as a relative scarcity of working capital. Thus, the only positive contribution to the change in GDP in the quarter stems from net exports of goods and services. While exports of goods and services actually declined y/y in the third quarter of 2015, the drop in net imports was many times more significant in line with trends in domestic demand and the slipping foreign purchasing power of the rouble. In fact, in real terms we estimate that net exports increased by 54.5% y/y in the third quarter.

Outlook and implications

The data on developments in GDP by expenditure category in the third quarter of 2015 continue to illustrate the blow to private consumers and to business sentiment due to the deterioration of the economy in the face of falling global oil prices, mutual economic sanctions including embargo of imports that has helped to fuel inflation and financial sanctions that have tightened credit conditions severely amid continuing serious structural problems. While the decline in overall GDP moderated slightly y/y in the third quarter of 2015 from that in the preceding quarter, this reflected to some degree a lower base of comparison, the seasonal importance of agriculture in the quarter and the rollout of some "anti-crisis measures" by the federal government. Nevertheless, as in the case of higher frequency data, there was some reason to imply that the trough of the economic downturn had passed and the economy was now stabilising. However, signs turned ominous again in the fourth quarter of the year as the price of a barrel of Brent crude oil fell well below USD40 per barrel and the exchange rate of the rouble against the USD inched over 72 while the exchange rate vs. the EUR headed to 80. The impact on the Russian economy can be seen from the consideration that some 50% of federal government revenues stem from the oil and gas sector while in 2014, for example, 98% of the aggregate corporate profit earned by the largest 500 Russian firms accrued to energy sector companies. IHS continues to estimate that GDP in 2015 declined by 4% and that a further moderate decline will take place in 2016. At the current time we expect that oil prices will recover modestly in 2016 with an average for dated Brent crude for the year just under USD48. At this writing, we put the decline in GDP in 2016 at a further 0.5%, but if oil prices were to remain closer to the current spot level, we would certainly revise the forecast downward due to the impact on domestic demand. The Central Bank of Russia currently expect a similar decline in GDP for 2016 but warns that with oil prices substantially below USD50 the bank would expect a further drop in GDP of 2–3%.