More rate cuts to come after Russia growth slows?

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.