Global Insight Perspective | |
Significance | Economic growth was notably slower in the first quarter of 2006 at 5.5% than the preceding quarter as extreme cold depressed fixed capital formation while net exports of goods and services continued to shrink in real terms. |
Implications | Household consumption remained the major driver of economic growth on the end-use side, boosted by rapid real increases in wages and disposable incomes. |
Outlook | Growth of fixed capital investment has already shown signs of rebounding from the disappointing performance early in the year and together with continued robust growth of household consumption, should boost growth for the full year to 6.0% |
RosStat has released data on developments in GDP by end-use in the first quarter of 2006. Sector of origin developments were released earlier (see Russia: 16 June 2006:GDP Growth in Russia Slows Markedly During Q1 2006) along with the overall growth rate for the quarter of 5.5% year-on-year (y/y). Comparing y/y growth rates of the end-use components of GDP in the first quarter with those for the four quarters of 2005, there are two categories in which sharp contrasts can be noted. First, growth of gross fixed capital formation slowed dramatically to only 5.8% in the first quarter of 2006. In the same quarter a year earlier, gross fixed capital formation grew at 8.2%, accelerating to 12.2% growth by the fourth quarter of 2005. This development was foreshadowed by monthly reports of gross activity indicators in early 2006 that showed sharp slowdown in growth of the value of construction work in real terms and of expenditure on fixed capital investment. The slowdown was most likely due to the extraordinarily cold weather in Russia in the first two months of the year. These gross activity indicators have registered marked improvement in later months and we expect that growth in gross fixed capital formation will rebound strongly in subsequent quarters of 2006. Gross investment, which includes both gross fixed capital formation and change in inventories, rose at 13.4% in the first quarter of 2006 compared with 15.0% growth registered y/y in the same quarter of 2005.
The other notable development in the first quarter of this year was the further acceleration of real growth in imports of goods and services on a national accounts basis. Imports of goods and services were up 25.7% y/y in the first quarter of 2006 compared with 15.4% in the same quarter a year earlier and 18.6% in the preceding quarter. Exports of goods and services grew at 7.8% in the first quarter of this year in real terms, more rapid than the 3.5%, 5.6% and 5.1% growth recorded in the first through third quarters of 2005, respectively, but less than the 7.8% growth in the fourth quarter of 2005. As a result of the much faster growth of imports than exports, net exports of goods and services fell 11.7% y/y in the first quarter of 2006. A year earlier, net exports had fallen by 10.7% y/y.
Trends in Russian GDP by End-Use | |||||
Year-on-Year Change in Percent | |||||
Q1 2005 | Q2 2005 | Q3 2005 | Q4 2005 | Q1 2006 | |
GDP | 5.0 | 5.7 | 6.6 | 7.9 | 5.5 |
Final Consumption | 6.7 | 9.5 | 9.1 | 8.9 | 8.5 |
- Household Consumption | 8.7 | 12.3 | 11.7 | 11.4 | 10.7 |
- Government Consumption | 1.4 | 2.0 | 1.9 | 1.9 | 3.3 |
- Non-commercial orgs. | 0.4 | 0.8 | 1.5 | -2.3 | -2.2 |
Gross Investment | 15.0 | 4.2 | 13.5 | 12.2 | 13.4 |
- Gross Fixed Capital Formation | 8.2 | 9.7 | 10.1 | 12.2 | 5.8 |
Net Exports of Goods and Services | -10.7 | -9.5 | -27.2 | -10.0 | -11.7 |
- Exports of Goods and Services | 3.5 | 5.6 | 5.1 | 10.3 | 7.8 |
- Imports of Goods and Services | 15.4 | 14.9 | 19.4 | 18.6 | 25.7 |
Household consumption continued to grow robustly, boosted by real increases in wages and disposable income. Household consumption grew at 10.7% y/y in the first quarter, comparing favourably with the 8.7% figure a year earlier but slightly behind the 11.4% growth in the fourth quarter of 2005. Booming household consumption also helped to boost imports. Government consumption grew at 3.3% in the first quarter. Quarterly y/y growth in 2004 remained in the range of 1.4-2.0% in contrast. Final consumption, the sum of consumption by private individuals, the state administration, and non-commercial organisations serving households, rose at 8.5% in the first quarter, a substantial acceleration relative to the 6.7% recorded in the same quarter of 2005.
Outlook and Implications
While Russian economic growth slowed markedly in the first quarter of 2006 relative to the final quarter of 2005 it was still a better performance than in the same quarter a year earlier, despite the impact of extreme cold on investment activity. Household consumption continued to be a major driver of overall growth and is projected to grow robustly in coming quarters as well as the sharply improved financial position of Russian enterprises allows for rapidly rising real wages. The government sector is a major employer and public employees' salaries have been on the rise as part of an effort to improve the efficiency of government services and make inroads against corruption. With the expected further rebound in fixed capital investment in the remaining quarter of 2006, the economic performance for the full year 2006 should top that seen in the first quarter. Global Insight is currently projecting GDP growth for the full year at 6.0%, only moderately down from the 6.4% recorded in 2005 but well shy of the 7%-plus growth in 2003-2004.