Russian GDP Growth Markedly Slower in 2008, Hit by Poor Q4 Results

Russia's Federal State Statistical Committee has released preliminary estimates of developments in GDP by both sector of origin and end-use for the full year 2008. GDP was reported to be up 5.6% year-on-year (y/y) in 2008, a marked deceleration from the 8.1% growth reported for 2007. If the GDP growth rates previously reported for the first three quarters of 2008 are not revised, the full-year result implies that GDP grew at only 1.5% y/y in the fourth quarter. On the sector-of-origin side, the most startling figure is the 0.7% growth in gross value added in industry for the full year. Industrial value-added averaged 3.6% annual growth in 2005-2007 following growth at 6.4% in 2004. Growth was the weakest in the extractive branches of industry where value-added grew at just 0.2% in 2008, but this was actually an improvement over declines registered in the preceding two year. In manufacturing, growth of value-added decelerated to 0.9%, down from growth rates in the 6-8% range in 2004-2007. The production and distribution of electricity, gas and water, by far the smallest of the three sub-sectors of industry, also registered improvement relative to 2007 with growth in value added growing at 1.2% compared with a 0.7% decline in 2007 that was associated with a particularly warm weather pattern in the winter quarter. While construction activity definitely slowed in the fourth quarter judging from monthly reporting, growth in value-added in construction actually accelerated from the previous year's figure of 9.3% to 13.2% in 2008 on the strength of the impressive performance in the first three quarters of the year. Slowing growth of value added was notable as well in the trade sector, to 8.4% y/y from 13.7% in 2007, in the financial sector, to 6.6% from 12.5% a year earlier, and the real estate sector, where the growth rate was nearly halved relative to 2007 at 10.3%. In contrast, a bumper harvest boosted growth of value added in agriculture to 8.4%, well above the results posted in the preceding four years. Growth also improved sharply in trade and communications, with growth of value added more than twice that in the previous year at 6.9%.

On the end-use side, most striking are the marked deceleration in the growth of gross fixed capital formation and the strong drag on overall GDP growth of rapidly shrinking net exports. Growth of fixed capital formation slowed to 10.3% y/y in 2008 from 21.1% a year earlier and 18.0% in 2006 thanks to deteriorating business confidence and reduced availability of financing as global credit markets tightened. Net exports of goods and services on a real national income accounting basis have been contracting consistently since 2004. Nevertheless, the 43.8% drop in net exports in 2008 is well beyond anything witnessed in the four preceding years. Exports of goods and service grew at only 0.2% y/y in 2008 compared with 6.4% growth in 2007 and 7.3% in 2006. While the full-year figure for import growth testifies to sharp deceleration in the fourth quarter, at 17.7% y/y it nevertheless creates a major leakage between domestic demand and GDP. In nominal terms, imports of goods and services represented some 24% of aggregate demand.

On the consumption front, households still enjoyed a substantial full-year increase despite some moderation of growth in private consumption in the fourth quarter. Household consumption grew at 11.5% y/y in 2008, down only modestly from the 13.6% growth recorded a year earlier and more rapid growth than was achieved in 2006. Growth of government consumption slowed to 2.5% from 3.4% in 2006 and the quarterly numbers imply that growth in government consumption actually picked up modestly in the fourth quarter. Growth in additions to inventories remained well into the double digits in 2008 and helped boost the figure for growth of gross capital formation to 13.3% y/y, but this still paled in comparison to 21.1% growth in 2007 and 18.6% in 2006.

Outlook and Implications