Russian GDP Growth in Q3 Raises Expectations for the Full-Year Result

RosStat has published the first estimate of developments in Russian GDP by sector of origin in the third quarter of 2006. GDP by end-use will be published at a later date. GDP grew at 6.5% year-on-year (y/y) in the third quarter after growth at 5.5% in the first quarter and 7.4% in the second. Using data published by RosStat on quarterly GDP as an index with a base of the quarterly average in 2003, we have calculated cumulative growth for the first three quarters of 2006 at 6.5% as well. This can be compared with growth in the same period of 2005 at 5.8%. The full-year 2005 result of 6.4% growth was the result of a sharp acceleration in the fourth quarter of that year to 7.9%. Official Russian projections in the past month or so have indicated that a similar acceleration is expected in the fourth quarter of 2006 and have therefore indicated that growth for the full year could fall in the range of 6.7-7.0%.

The pace was set in the first three quarters of 2006 by the construction sector, where the contribution to gross value added (GVA) rose at 14.5% y/y in the third quarter and 10.6% in the first nine months of 2006. This was followed by financial activity, where GVA grew at 10.3% in the quarter three and 9.6% in the first three quarters. While growth in GVA in the three sub-sectors of industry grew at less than the average rate, there was a marked improvement relative to the 2005 achievement. GVA in natural resource extraction came in at 3.8% in the third quarter and 3.0% for the first three quarters, relative to 1.1% and 1.5%, respectively, in the comparable periods of 2005. Manufacturing experienced a similar acceleration of growth. GVA in manufacturing rose at 6.3% y/y in the third quarter and 6.1% in the first nine months of 2006. In 2005, growth came in at 4.9% for the third quarter and only 3.3% for the first nine months. GVA in the electricity, gas and water supply sector rose at 4.0% in quarter three 2006 with cumulative growth at 5.3% while in the same periods of 2005 the figures were only 1.4% and 1.3%, respectively.

Despite the continued robust increases reported in real retail trade turnover, growth decelerated in the trade sector relative to a year earlier, although it remained fairly strong. Growth in the third quarter slipped to 6.6% y/y while in the same quarter of 2005 it rose at 12.7%. The comparison for the first three quarters of the year in the trade sector is growth of GVA at 9.1% in 2006 against 11.6% achieved in 2005. In addition to financial activity, among the various service sectors it is interesting to note the sharp acceleration of growth in state administration, which includes the armed forces and security apparatus. GVA in this sector, which is largely salaries, rose at 2.8% in the third quarter and the first three quarters of 2005 but grew at 6.8% in the third quarterof 2006 and 6.9% in the first three quarters, reflecting among other things increases in military and public sector wages.

Outlook and Implications

While the economy got off to a relatively slow start, by recent Russian standards that is, in the first quarter of 2006 thanks partly to extraordinarily cold weather, the accelerated pace in the second quarter has been maintained in the third according to these preliminary figures. On the production side, growth continues to be led by the non-tradable sectors as manufacturing has faced the problem of a strengthening currency while growth has been slowed in resource extraction by capacity constraints reflecting an insufficient flow of investment over an extended period. On the end-use side, robust private consumption and an ongoing investment boom have driven growth of GDP. The early indications of continued very strong expansion of domestic demand in the fourth quarter as well as improved results reported by the manufacturing sector have convinced official Russian forecasters to raise their projections for the full year 2006 from 6.4-6.6% to 6.7-6.8% and the World Bank has recently indicated in its periodic report on the Russian economy that growth may hit 7% this year. The World Bank ascribes the likely success in meeting end-year inflation targets despite hikes in federal spending and rapid increase in money supply to this faster than expected growth in the real sector. Global Insight will also be increasing its projection for the full year 2006 from its current 6.4% by several tenths of a percentage point in our next forecast round as a result of the third-quarter numbers as well as the early indicators of robust growth for the fourth quarter.