Russian GDP growth slows notably in 2012

RosStat has released a first estimate of developments in GDP by both end-use and sector-of-origin in the full year 2012. No data are provided for the fourth quarter as yet. Typically a revised set of quarterly GDP figures consistent with the annual numbers would be made available at the end of the first quarter. GDP grew at just 3.4% in 2012 compared with an upwardly revised 4.5% rate of growth achieved in 2010 and 4.3% in 2011. If the quarterly figures in January–September 2012 are not revised downward, this would mean that there was further marked deceleration of economic growth in the fourth quarter given growth at 3.9% year-on-year (y/y) in the first nine months of 2012. We estimate that growth would have taken place at just 2.1% y/y in the fourth quarter compared with 4.9% in the first quarter, 4.0% in the second and 2.9% in the third.

Turning first to the sector-of-origin data, we note the substantial drop in value added in agriculture in 2012, by 3.8%. However, 2011 serves as a high base of comparison for the 2012 performance as value added in the sector more than rebounded from a dreadful 2010 agricultural year, growing at 16.9%. Industrial performance was also disappointing in 2012 with growth in value added in that sector at just 2.2%, down from 7.5% in 2010 and 4.0% in 2011. Among the sub-sectors of industry, manufacturing still set the pace, but the 2.2% growth recorded in 2012 paled in comparison with a 9.7% increase in 2010 and 5.3% in 2011. Value added in natural resource extraction rose at just 0.9% in 2012, down from 2.9% a year earlier. Growth in value-added in electricity, gas and water supply remained anaemic, actually flat in 2012 after just a 0.5% increase a year earlier. The best performances were reported by sectors connected with households and the end-use data discussed below point to household consumption as the most important driver of growth in 2012. The stellar result was in the financial services sector with growth at 15.0% in 2012 as wages and incomes surged in both nominal and real terms. Other strong performers for this same reason were the trade sector with growth at 6.5% and hotels and restaurants at 4.8%. In contrast, value added in state administration, national security and social welfare services declined by 1.2% y/y in 2012 and value added in education rose by a mere 0.1%. In the latter case, however, this followed two years of very significant downturns in education.

The end-use data, as indicated above, point to the key role of the consumer in driving Russian economic expansion in 2012. While household consumption grew at 6.6% y/y in 2012, government consumption was flat and as a result final consumption grew at a more moderate 4.8%. After two years of very strong increases in gross capital formation, it grew at a far more modest 5.3% in 2012. While the growth of gross fixed capital formation did slow notably to 6.0% from 10.2% a year earlier, inventory investment actually declined by 5.9% y/y in 2012 after a very sharp increase a year earlier. The other category that weighed on the overall growth rate of GDP was net exports. With real growth of imports of goods and services at 8.7% far outpacing the growth of exports of goods and services at only 1.8%, net exports declined by 16.4% in 2012. Although the contraction of net exports had been even sharper in 2011 at 30.3%, it had been offset by the hefty boost in inventory investment that year.

Outlook and implications

With the slowdown in the fourth quarter of 2012 evidently more noteworthy than we had estimated, we believe that the negative developments will cast their shadow over the first half of 2013 as well. We have trimmed our forecast for 2013 to 3.2% from an earlier 3.4%. The relatively slow growth in the first half of 20113 will reflect slack export demand and likely stable inventories given business sentiment (the December manufacturing PMI was down to 50.0). However, we expect growth to recover to 4.1% in 2014 and 3.9% in 2015, essentially demarking the trend growth rate for Russia through the medium term.

The deceleration of growth has caused a major debate in Russian policymaking circles. The Central Bank of Russia (CBR) actually raised rates 25 basis points in September 2012 as it became clear that end-2012 inflation would be well above the 5-6% target band. (It came in at 6.6% and bumped up further in January to our estimate of 7.0% while the CBR has kept the target band at 5-6% for this year). The CBR has had rates on hold since, first indicating some flexibility in the near term but in December sounding more hawkish on inflation. At the same time, pressure on the CBR has grown from politicians and industrialists to cut rates in order to spur growth as a 5% pace would be much more to their liking. President Vladimir Putin called for monetary loosening to support the economy on the very day the 2012 numbers were released. The CBR, however, has been adamant that credit expansion is supporting consumer spending while the economy is producing at very close to its potential rate. The CBR maintains that monetary and financial conditions are not constraining growth at this point. The International Monetary Fund (IMF), after a visit to Moscow in January, urged Russia not to ease monetary conditions and to tighten the fiscal stance as laxer policies would not contribute to growth but only to higher inflation. CBR chairman Sergei Ignatyev will come to the end of his term in June. The likely replacement would be his first deputy, Alexei Ulyukaev, who has been a prominent public advocate for Ignatyev's policies. Another possibility would be Alexei Kudrin, former finance minister and a champion of the liberal wing in policy circles and an advocate of fiscal responsibility in Putin's cabinet when he was prime minister. If, however, Putin turns to a commercial banker instead, it will set off alarm bells as commercial bankers have been prominent in the call for looser credit conditions. This all could backfire on Putin, on the other hand, as surveys have consistently shown that inflation is the number one economic issue for Russian voters, not the pace of economic expansion.