Economics

More rate cuts to come after Russia growth slows?

Russian growth slowed more than the market expected in the third quarter, supporting the argument for further rate cuts by the central bank.

13/11/2017

Craig Botham

Craig Botham

Emerging Markets Economist

Russian activity slowed by more than the market expected in the third quarter. Alongside the ongoing deceleration of inflation, this could support a longer rate easing cycle from the Central Bank of Russia.

Russia’s economy expanded 1.8% y/y, down from 2.5% the previous quarter. However, based on industrial production and retail sales data for the quarter, we had actually anticipated a greater slowdown.

As this was an advance reading, we do not yet have a breakdown of the contributions to GDP.

Industrial production underperforms

Yearly industrial production growth in the months of July to September averaged 1.2%, while retail sales saw a stronger 2.1% average print.

Given the ongoing strength of oil prices, it perhaps seems odd that industrial production is not performing more strongly, given the structure of the Russian economy.

However, Russian oil production faces a physical constraint in the form of the OPEC production quota. While the quota makes financial sense for Russia, it is going to weigh on real activity (which is concerned with volumes rather than values), and we expect this to persist in fourth quarter data.

We suspect that agricultural output, which grew at an average rate of 3.6% in the third quarter from a small contraction in the previous quarter, explains the difference between our model and the actual GDP print.

The GDP breakdown to be revealed in December will confirm whether this is the case.

Faster growth in 2018?

We expect an acceleration of growth in Q4 and further gains in 2018 as the economy sees some benefits from higher oil prices filtering through to expenditure, and as rate cuts continue to feed through. 

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.