The Russian economy expanded by 4.9% in the 1Q y-o-y, above its long-term trend. Although the manufacturing PMI had a surprise downside move in June to 51.0 from 53.2 a month earlier, the fact that the industrial sector is expanding despite unfavourable external demand driven by the Euro-zone crisis illustrates the resilience of the oil exporting economy. All key components weakened in June.
Output PMI fell to 51.6 from 53.8, new orders fell to 52.1 from 54.9, employment fell to 49.6 from 52.2 (JP Morgan, 6 July 2012). On a more positive note, inventories were cut in June, indicating firm demand and leaving forward-looking orders to inventories unchanged. According to JP Morgan (6 July 2012), business confidence in Russia remained firm last month while electricity consumption accelerated to 1.8% compared to a year ago. A slowdown in economic activity in response to the global slowdown, as well as lower commodity prices and tighter domestic monetary policy are all possible; but a sharp decline in economic growth is not expected. We forecast 3.7% GDP growth in Russia in 2012 and 3.4% in 2013.
Domestic demand also helped the expansion of the economy as a whole as the government stepped up its spending prior to the March presidential election. The Russian central bank left interest rates unchanged at its policy meeting in May. As inflation has been accelerating in June, mainly on food price inflation, the move was seen as an effort to keep inflationary pressures under control while allowing the economy to grow near its potential level on the back of favourable oil and commodity prices. However, economic growth remains fragile as the industrial sector expanded by only 1.3% in April, below its trend and less than market expectations. The mild weather reduced demand for electricity by more than 14% in April compared with a month earlier. Retail sales also slowed in April, indicating that economic growth is facing difficulties and may start to flatten in the coming months.
The effective exchange rate of the rouble against the US dollar fell by 0.5% in April without any intervention from the central bank of Russia in foreign exchange markets. According to the EIU (June 2012) the Russian banks have now accumulated net foreign assets of US$ 62 bn, in contrast to US$ 100 bn net foreign liabilities in 2008. Leaving the interest rate unchanged amid a deprecating rouble might be, to some extent, a result of accelerating inflation, which in June made an upward surprise move reaching 4.3% on an annual basis after falling to a record low in April. Inflation is expected to rise further in the coming months as the indexation of regulated prices will lift core inflation. An expected increase in utility tariffs is also expected to affect consumer prices positively.