Research Team at Danske Bank, suggests that according to preliminary data, Russia’s GDP shrank 3.7% y/y in 2015 versus 0.6% y/y growth in 2014.
Key Quotes
“The path of economic contraction continues to slow. GDP shrank 2.5% y/y In January 2016 versus a 3.5% y/y fall in December 2015. We expect the economy to shrink 2.1% y/y in 2016 if the crude price stays at USD31/bl on average, while we would expect expansion to happen if the oil price climbs to USD59/bl on average.
The supply-side indicators touched the bottom in Q3 15, while recovery prospects remain very fragile, as the Brent oil price average YTD is still under USD35/bl. However, Russia’s oil production hit its post-Soviet high, climbing to almost 11m bpd. Seasonally adjusted data show that industrial production grew 0.3% m/m in January 2016, while construction shrank 1.5% m/m seasonally adjusted.
Growth in private consumption continued to be negative, as real disposable income is shrinking, inflation is high and purchasing power for imported goods has fallen significantly. Food inflation is decelerating due to the high base effect but weighs on private consumers, with 9.2% y/y in January versus 14% y/y in December 2015.
FX and monetary policy outlook
Russia’s central bank (CBR) kept its key rate unchanged at 11.0% on 29 January in line with our expectations and those of consensus. The main reasons given by the central bank for holding rates were ‘another oil price slump’, high levels of consumer price growth and a higher risk of accelerated inflation despite continuing disinflation. We expect the CBR to stay on hold at its next meeting on 18 March 2016, while risks for resuming monetary easing have increased on a higher oil price and stronger RUB, which are subduing price growth further.
Inflation eased to 8.1% y/y in February, from 9.8% y/y in January, as prices already included the RUB devaluation and the high base effect is weighing on the CPI. We expect 2016 inflation to stay single digit, posting 8.1% y/y in December 2016.
As we expected, the RUB continues to be the best play among oil producers on a rising oil price. Yet, Russia’s currency has moved closer to its equilibrium levels, as its strengthening has been subdued. We continue to be bullish on the RUB in the long run, as the free float is protecting Russia’s current account surplus and economy despite probably another year of a slump.
Risk factors
Potential upside risks to our macro outlook are a higher oil price, easier monetary policy and expansionary fiscal policy before the parliamentary elections in the autumn. Yet, we do not expect the revoking of sanctions. An escalation of geopolitical issues and a tumbling oil price are downside risks to our GDP growth forecasts.”
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