Russia: Economic growth slows to over one-year low in Q2
According to a preliminary reading, GDP growth slowed markedly to 4.0% year on year in the second quarter, marking the weakest result since Q1 2023. Q2’s reading fell short of both Q1’s 5.4% expansion as well as market expectations of a 4.2% rise.
Although the release did not include a detailed breakdown, available monthly data suggests that the slowdown was broad-based. On the production side, all key sectors of the economy, barring water supply, seem to have lost momentum in Q2. Industrial output growth slowed from the prior quarter due to a sharp contraction in mining and quarrying output and a softer increase in manufacturing production. On the expenditure side, accelerating price pressures and tight financing conditions likely weighed on household spending; retail sales rose at the softest pace in over one year in Q2.
Meanwhile, the labor market remained overheated in the three months to June, with the unemployment rate falling to its lowest level since our records began in late 1992—though the rate was likely flattered by a shrinking workforce—and wage growth likely continuing to outpace inflation.
On the external front, the nominal value of merchandise exports returned to growth after one-and-half years of contractions, contrasting a still-sharp fall in nominal imports and pointing to a better external sector performance.
Our panelists expect the economy to gradually shift into a lower gear in H2 from H1, hit by the fallout from the Russia-Ukraine war: Supply capacity will remain firmly below demand due to increasing demand for new army recruits exacerbating labor shortages, and the ruble should feel the weight of mounting international sanctions, in turn leading to higher price pressures and further monetary policy tightening by the Central Bank. Meanwhile, the construction sector will take a further knock from the end of a mortgage subsidy program. Meanwhile, war-related government spending and investment will remain robust but lose momentum due to a less favorable base of comparison.
Overall in 2024, our Consensus is for economic growth to only tick down a tad from 2023’s rate as sanction circumvention fuels a recovery in exports of goods and services.