Russia: Weak Investment Hampers Q1 Activity

Consensus Forecasts

Real GDP growth cooled to 1.6% (y-o-y) in Q1, from 2.1% in Q4 2012, as the protracted euro zone recession hurt export demand and saw Russian firms slash investment. In addition, despite a 2.6% (y-o-y) rebound in March, industrial production remained unchanged from a year earlier in Q1, after weakness in January and February. The slowdown in the economy in Q1 has caused our panel to downgrade its full-year forecast to 2.9% from 3.2% last month. Elsewhere, the labour market has improved and the unemployment rate edged down to 5.7% in March from 5.8% in February, lifting hopes of an upturn in consumer spending. Retail sales advanced by a greater-than-anticipated 4.4% (y-o-y) in March, after slowing to 3.0% in February.

Bank Rossii, the central bank, continues to resist calls from the government to adopt looser monetary policy to kickstart faster economic growth. It held the refinancing rate at 8.25% in early May, 50bp above the record-low, even though rate reductions have occurred across Europe. Inflation, measured by the CPI, reaccelerated to 7.2% (y-o-y) in April, from 7.0% in March (monthly data and forecasts, bottom box), as a depreciation in the rouble led to higher import costs. Bank Rossii is targeting a range of 5.0% to 6.0% for inflation for end-2013, compared with 6.6% in 2012.

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