Russia Economic Insights: Growth has reached peak recovery in Q2

The economy skyrocketed after a modest drop in Q1 (-0.7% yoy), which, however, was pushed into the negative zone by the leap year effect (February 2020 was one day longer than February 2021). Further, GDP went on with growth in quarterly terms for the 4th quarter in a row and the observed pace continues to exceed pre-pandemic levels (1.6% qoq in Q2 2021 vs. 0.5% qoq on average in the 2017-2019 period). The yearly growth rate slowed down in June: 8.5% yoy after 10.8% and 10.9% yoy respectively in April and May, according to Ministry of Economy's monthly estimation, which corresponds with the first quarterly estimation done by Rosstat. A certain slowdown did not prevent the economy from returning to pre-crisis levels (Q4 2019, seasonally adjusted numbers).

The trade component became one of the key drivers of GDP growth in Q2 (5.8pp) due to strengthening of consumption. While private incomes demonstrate a decent recovery, consumer credit acceleration and slower deposit growth continue to provide the main support. As a result, consumer spending even reached pre-crisis levels in H1 2021. The industrial production contribution was second in terms of significance — 5.3pp in Q2. The revival in export backs the positive IP dynamics, which also finished H1 2021 surpassing pre-pandemic levels. Further, in May-June oil and gas production considerably contributed to the yearly pace (see Chart 2) amid the low base effect of the previous year (oil production shrinkage started from May 2020 due to the OPEC+ restrictions imposed).

In H2 2021, the low base effect will fade and only fundamental factors will support the economy. However, in our view, their potential is rather limited. Firstly, although this year’s budget expenditure will be higher than implied by the budget rule, any additional increase is unlikely as authorities have announced their intention to normalise fiscal policy. Secondly, the active import recovery amid still hampered oil & gas exports will serve as a constraint for the economy. Overall, taking into account the explosive growth in Q2, which slightly exceeded our expectations, we revise the outlook for economic growth from 2.3% to 3% yoy in 2021, while still maintaining a rather conservative view on H2 2021.

The pandemic situation in Russia is still on the government's radar. Amid progress achieved in the vaccination pace, new daily cases numbers are declining, but the situation is uneven across the country’s regions: e.g., in Moscow the lifting of some restrictions has been allowed — the obligatory remote work format (30% staff maximum) was cancelled. However, the overall percentage of the vaccinated population in Russia is ~22%. Nevertheless, the third wave in Russia is probably wrapping up (see Chart 3) with no material impact on key macroeconomic indicators. In our view, it remains a tail risk for economic growth as the effect would be visible only in the case of tight country-wide restrictions, which is highly unlikely.

At the July rate-setting meeting in its bid to combat inflation surge, the CBR proceeded with a 100bp hike (the boldest step since the 2014-15 crisis), moving the key rate to 6.5%. In our view, the move was of a preemptive nature and will allow the regulator to avoid major adjustments within the current tightening cycle. Since mid-July, the CPI weekly data has started to demonstrate certain improvement backed by the good harvest. For July, the CPI modestly levelled off to 6.46% yoy (from 6.50% yoy in June).

In our view, the CPI will stabilise at the current level (~6.5% yoy) in the near future, but in autumn a disinflationary effect will come from (1) the fiscal policy normalisation trend, (2) macroprudential tightening, (3) a partial shift from spending to saving backed by increasing deposit rates. We do not expect the CBR to stop the tightening cycle until a persistent disinflationary trend is observed: an additional 25bp hike in early autumn is in our forecast (see Chart 4).