Global Insight Perspective | |
Significance | Although gross value added grew more slowly in Q2 in some sectors, manufacturing and trade in particular, the 8.0% rate of growth for the first half remained enviable. |
Implications | Turmoil in international capital markets had not yet taken its toll on the Russian economy in the first half of the year and except for natural resource extraction, sectoral performances held up, boosted by strong domestic demand. |
Outlook | We are likely to see more significant deceleration in the second half of 2008 as enterprises run up against liquidity shortages given tighter global credit conditions and an increased perception of Russian risk by potential foreign investors and lenders. |
RosStat has published the first estimate of developments in Russian GDP by sector of origin for the second quarter and first half of 2008. GDP rose at 7.5% year-on-year (y/y) in the second quarter following growth at 9.5% y/y in the final quarter of 2007 and at 8.5% in the first quarter of 2008. For the first half of 2008, GDP was up 8.0% y/y compared with 7.8% registered in the first half of 2007. Despite the enviable performance of the Russian economy overall in the second half, there were some sectors that experienced some deceleration in the second quarter. Most notably, gross value added (GVA) in manufacturing grew at 5.6% y/y in the second quarter compared with 7.6% in the first quarter. Net output of manufacturing was up 6.6% for the first half of 2008 compared with 7.9% growth in the same period a year earlier. GVA in resource extraction declined 1.0% y/y in the second quarter and squeaked up only 0.2% in the first half of 2008 although this was still somewhat ahead of the 0.2% decline in the first half of 2007. Production and supply of electric power, gas and water grew at only 1.7% in the second quarter following growth at 5.3% in the first, however the 3.8% growth of GVA in that sector in the first half of 2008 at 3.8% was well ahead of the 6.0% decline registered a year earlier. That decline had reflected a return to more normal winter weather in 2007 compared with an extraordinarily cold 2006.
Trends in GDP by Sector of Origin | ||||
% Change Y/Y | Q2 2007 | H1 2007 | Q2 2008 | H1 2008 |
Agriculture and Forestry | 2.8 | 2.6 | 3.2 | 3.2 |
Industry | 3.1 | 3.7 | 3.2 | 4.2 |
Construction | 19.6 | 23.0 | 18.7 | 22.7 |
Trade | 13.2 | 12.1 | 11.7 | 11.8 |
Transport and Communication | 8.4 | 8.5 | 9.4 | 9.5 |
Financial Activity | 11.5 | 11.3 | 9.7 | 9.7 |
Real Estate | 8.5 | 7.8 | 8.1 | 8.5 |
State Administration | 8.2 | 8.0 | 2.9 | 3.3 |
Education | 1.0 | 0.9 | 1.0 | 0.6 |
Healthcare | 3.1 | 3.2 | 0.7 | 0.9 |
Other Services | 11.4 | 11.0 | 6.5 | 6.2 |
GDP | 8.1 | 7.8 | 7.5 | 8.0 |
Source: RosStat and Global Insight calculations | ||||
Results for construction were very similar to those a year earlier as investment activity remained robust. In line with modestly slower growth of real retail trade turnover reported monthly, growth of GVA in trade slipped modestly to 11.7% in the second quarter of 2008 compared with 13.2% registered a year earlier. Growth of GVA in public administration, healthcare and other services, including communal, social and personal services, was notably slower in the first half of 2008 compared with a year earlier. Most of the GVA in those branches consists of salaries and wages and public-sector employees realised substantial increases in compensation in the first half of 2007.
Outlook and Implications
The performance of the Russian economy in the second quarter and first half of 2008 stands in sharp contrast to the negative developments in the external economic environment over that period. Moreover, it did not foreshadow the turmoil in Russian asset markets, beginning with a correction in the equities market from May onwards and accelerating following Russia's incursion into Georgia in August. While some enterprises were experiencing shortages of liquidity at the outset of the year, the Central Bank stepped up handily to inject roubles into the system. However, ongoing bureaucratic battles with the private sector, including over control of the giant TNK-BP British-Russian joint energy venture and the sanctions levied against Russia's Mechel coking coal enterprise for charging too high a price for deliveries to domestic steel producers have caused investors to re-examine the risks associated with the Russian environment. Jitters increased following the Russian invasion of Georgian territory which exacerbated relations between Russia and the United States and EU. After new President Dmitry Medvedev had gone to considerable lengths to assure investors that supported the rule of law in the Russian economy after acceding to office in May, the events which followed caused investors to doubt either his sincerity or his ability to deliver given the demonstrated power and ambitions of Prime Minister Vladimir Putin. Now well into the third quarter of the year, the capital flight that resulted has left Russian enterprises short of liquidity with limited access to foreign borrowing. At the same time, while the Central Bank is giving assurances that it has massive resources on which to draw and is willing to inject necessary liquidity into the system, the impact on inflationary pressures and the exchange rate are problematic. Thus we can expect to see further and more significant moderation of Russian economic growth in the second half of 2008 as the credit crunch finally takes hold.