Article / 16 August 2017 at 12:00 GMT

Russia's brisk economic growth could fizzle in H2

Russia oil and gas expert
United Kingdom
  • Russia's Q2 GDP growth accelerates to 2.5% y/y
  • Gas industry was star performer as output and exports surged by double digits
  • Transport sector was also buzzing
  • Q1GDP growth of 0.5% y/y might be more indicative of the underlying trends
  • Most recent statistics show industrial output growth slowed to 1.1% y/y in July
  • Industries that benefited from H1 surge could weaken in H2

Kaliningrad shipping centre
 Kaliningrad freight centre. The Russian transport sector, too, was 
humming in the second quarter. Photo: Shutterstock

By Nadia Kazakova

The stars finally aligned for the Russian economy in the second quarter of 2017. 

Industrial output grew 3.8% year-on-year in the quarter, with the mining sector up 4.8% y/y. The Russian gas industry was the star performer as output and exports surged by double-digit figures. 

Russia's monthly coal, oil and gas output, million tonnes
Source: Note: conversion factor for natural gas (bcm to mn tons) is 0.967.

Unusually cold weather in Russia had power utilities working extra hard. The transportation sector was buzzing, moving all the gas, crude oil, petroleum products and coal as well as various other goods both domestically and to exports. 

Russia's key macroeconomic indicators, % y/y

The retail sector has finally turned the corner as wages started to catch up with inflation, and manufacturers rushed to meet extra demand for a range of products, from white goods (production of fridges was up 8.5% y/y, washing machines up 23% y/y in June) to clothes and shoes. Passenger car output climbed 16% y/y in June to 121,000 vehicles (+20% y/y in H1), though from relatively low levels last year.

The government must have also chipped in with orders for public-sector goods – such as computers, radars (probably mostly for military). A delivery of school buses was reportedly the reason for a 32% y/y jump in their output in June. 

The question is if this recovery is as broad-based as it looks and as hailed by the economy ministry — or whether it is a temporary phenomena driven by a combination of one-offs, which might fizzle as rapidly as they have appeared. 

GDP growth of 0.5% y/y in the first quarter might be more indicative of the underlying trends than a jump of 2.5% y/y in Q2. In both quarters, though, the oil and gas sector (shown in the following table as "mining") and their downstream counterparts (refining, chemicals, transport and oil and gas equipment) remain the base for the economic growth. 

Russian GDP components and GDP growth in 1Q17, % y/y

The trickle-down effect (via taxation) of stable oil prices (in roubles) and lower inflation does have a positive impact on wages and growth outside the petroleum-related parts of the economy. The recovery there seems tenuous. 

The most recent statistics show that industrial output growth slowed in July, to 1.1% y/y. While the mining sector is still accelerating, up 4% y/y, manufacturing was down 0.8% y/y. 

The recovery in real wages and incomes remains a double-edged sword for the Russian economy. Imports are on the rise, up 26% y/y to $57 billion in Q2 (exports were up 21% y/y to $82 billion). 

Along with other factors (dividend payments, seasonal tourism), that meant a negative balance of payments for Russia of $0.3 billion in Q2. The economy ministry expects the trend to persist, resulting in a $5 billion balance of payment deficit (and a weaker rouble) in 3Q17.

As the natural resources extraction sector growth goes into reverse in the second half of the year (on high base effects, Opec-related output constraints), it might lead to widespread weakness in the very industries that benefited from the output surge in H1. Alas, domestic demand remains too nebulous (and still oil-price/oil-tax-dependent) to serve as a credible counterbalance.

— Edited by John Acher

Nadia Kazakova is a Russian oil and gas specialist

18 August
fxtime fxtime
Great analysis Nadia. :-)
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