Economic growth slows to one-and-a-half-year low in Q3

Expansion surprises markets and Central Bank on the downside: According to a preliminary reading, the economy continued to tap on the brakes in the third quarter, with GDP growth slowing markedly to 3.1% year on year and marking the softest increase since Q1 2023. The result fell short of Q2’s 4.1% and undershot both the projection of the Central Bank (CBR) and market expectations.

Broad-based weakness hits growth: Absent a detailed breakdown, available monthly data suggests that the slowdown was broad-based. On the production side, industrial output growth dropped to a six-quarter low in Q3 due to a sharp contraction in water supply and slower momentum in the energy supply sector. On the expenditure side, domestic demand was likely subdued. Inflation continued to climb in the quarter—while nominal wage growth was largely unchanged from Q2 in July–August. This, paired with ongoing monetary policy tightening, likely dented fixed investment and household purchasing power; retail sales grew at a weaker pace in Q3 compared to Q2. Meanwhile, the labor market remained overheated in the three months to September, with the unemployment rate falling to a fresh all-time low in Q3, as the protracted war continued to fuel a pronounced labor shortage. On the external front, merchandise exports growth slowed to a crawl in Q3, contrasting a recovery in imports and pointing to a weaker external sector panorama.

Muted growth and elevated inflation ahead: Our panelists expect the economy to be decelerating further in Q4 and for this trend to continue in Q1 2025, after which growth is forecast to stabilize at a lower level until year-end. As a result, our Consensus is for economic growth to more than halve from 2024’s projection next year, falling short of the pre-pandemic 10-year average of 1.9%. The fallout from the Russia-Ukraine war will continue to weigh on momentum: Domestic demand will continue to outpace supply capacity due to persistent labor shortages, driving inflation to remain firmly above target in 2025. Moreover, sanctions will lead to a weaker currency year on year. Finally, the CBR’s monetary policy tightening cycle will weigh on fixed investment and, more broadly, domestic demand.

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