 | Deceleration in Investment Leads to Slower GDP Growth Data released this morning showed that real GDP in Russia grew only 0.9 percent on a year-ago basis in Q4-2017 (top chart), which was much weaker than the consensus forecast had anticipated. Upward revisions to previous quarters, however, brought the annual GDP growth rate up to 1.5 percent, which matched the consensus forecast. The annual growth rate was the strongest outturn since 2013, although it is lackluster relative to the growth rates that the Russian economy achieved in the years leading up to the global financial crisis and in its immediate aftermath. A breakdown of real GDP into its underlying demand components showed that growth in household consumption expenditures remained resilient at a year-over-year rate of 4.3 percent in Q4, marginally higher than the 4.2 percent rate posted in Q3. But investment spending decelerated appreciably in the fourth quarter as the year-over-year growth rate slowed to 3.4 percent from 4.0 percent during the previous quarter. Inventory building also appears to have weighed on overall GDP growth in the fourth quarter. The Russian ruble nosedived in 2014-2016 due to the one-two punch of western sanctions following Russia’s annexation of Crimea and the collapse in oil prices. This sharp depreciation of the currency caused CPI inflation to soar (middle chart). But, the combination of currency stabilization over the past two years, and sluggish GDP growth, has caused inflation to recede to only 2.2 percent at present, the lowest rate since the Soviet Union disintegrated in the early 1990s. Consequently, the Central Bank of the Russian Federation has been in rate-cutting mode over the past three years, and most analysts look for it to ease policy further in coming quarters. Despite the slowdown in the overall rate of real GDP growth in the fourth quarter, we look for the economic recovery in Russia to remain intact. Growth in real exports of goods and services strengthened to a year-overyear rate of 5.2 percent in Q4-2017 from 4.7 percent in Q3. With global economic growth likely to remain solid, growth in Russian exports should remain resilient. The decline in inflation should help to boost real income growth, which should continue to support growth in consumer spending. Monetary easing should help to shore up interest rate-sensitive spending. That said, Russia clearly is not going back to the super-charged growth rates that characterized the pre-crisis years. For starters, the country’s population is currently contracting, and the United Nations projects that the rate of decline will pick up in coming years. Everything equal, population contraction is associated with economic deceleration. Second, low oil prices and tensions with the West mean that foreign direct investment (FDI) in Russia probably will not return to that of the boom years (bottom chart). Lower investment and technology transfer should also weigh on economic growth. |
