In Russia

Bloomberg News, Tuesday, May 17, 2016

GDP shrank annual 1.2% in first quarter, better than estimated. Bank of Russia says rate cuts won’t bring ‘significant growth’.

Headquarters of Central Bank of Russia

Headquarters of Central Bank of Russia

Russia’s economy contracted less than forecast in the first quarter of 2016, with the central banker overseeing monetary policy signaling that cheaper borrowing costs won’t boost growth.

Gross domestic product fell 1.2 per cent from a year earlier after a decline of 3.8 per cent in the previous three months, the Federal Statistics Service said on Monday. That was less than all but one forecast of 22 analysts in a Bloomberg survey, whose median was for a contraction of 2 per cent. The Economy Ministry in Moscow had projected a 1.4 per cent decrease.

While oil’s collapse and the worst currency crisis since the sovereign default in 1998 sent real wages plunging the most since President Vladimir Putin came to power, it also helped raise the competitiveness of some industries as the economy endures its longest recession in two decades. With interest rates on hold since July, there’s still little prospect of imminent relief from the central bank.

Bank of Russia First Deputy Chairman Dmitriy Tulin (Igor Russak, RIA Novosti)

Bank of Russia First Deputy Chairman Dmitriy Tulin (Igor Russak, RIA Novosti)

“In the current conditions, a reduction of the key rate wouldn’t result in any significant growth of the real economy,” Bank of Russia First Deputy Governor Dmitry Tulin told lawmakers in Moscow. “If we believed that our policy was killing the real sector, our enterprises, and is choking the shoots of economic growth, then we probably would consider another path for the movement of the key rate.”

The central bank has kept its benchmark interest rate at 11 per cent after five reductions rolled back most of an emergency increase to 17 per cent in December 2014, which it used after allowing the ruble to trade freely. Forward-rate agreements are signaling 55 basis points of decreases in borrowing costs during the next three months, the most since March.

The ruble, which plunged to a record low in January, has stabilized as crude rebounded. It’s gained more than 13 per cent against the dollar, the best performance globally this year, after a 20 per cent loss in 2015.

The central bank has credited the ruble’s free float for helping offset the external shocks. Changes in the economy are bringing closer “a phase of recovering growth,” policy makers said in a statement April 29, when they kept borrowing costs unchanged for a sixth consecutive meeting. Bank of Russia Governor Elvira Nabiullina last month highlighted agriculture alongside the food and chemical industries as positive examples.

‘Positive signals’

“The most important thing right now is probably how the economy is adjusting to new conditions,” Nabiullina said last month. “And we see some positive signals, some of the expected shifts have began in the structure of the Russian economy. There’s a shift from non-tradable sectors to tradables, especially those oriented toward exports.”

The annual decline in industrial output averaged 0.7 per cent in the first three months, slowing from 3.4 per cent in 2015. The average contraction in retail sales eased to 5.4 per cent in January-March from 9.7 per cent last year.

Energy remains the lifeblood of the economy. Russia, one of the world’s biggest oil exporters, is looking to cut its dependence on commodities prices after their collapse plunged the country into recession.

Longer recession?

The Economy Ministry predicts that the annual contraction will slow to 0.2 per cent in 2016 from 3.7 per cent in 2015. While the central bank is more pessimistic, forecasting a drop of as much as 1.5 per cent, it says quarterly GDP growth may return in the second half of this year or in early 2017.

An additional working day in the first quarter because a leap year may have skewed GDP data, according to Capital Economics Ltd. in London. Still, it estimates seasonally-adjusted GDP probably rose over the quarter, with annual growth possibly resuming in the second half.

“The acute phase of the crisis is now over,” Liza Ermolenko, an analyst at Capital Economics, said in a report. “But even so, given the numerous headwinds facing the Russian economy, we still expect the recovery to be disappointingly weak.”

Read also:
Bank of Russia ‘fetish’ doubted by analysts seeing long game, by Andre Tartar, Bloomberg News, May 10, 2016, Bloomberg News

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