How low can it go?
Russia, which Moody’s Analytics estimates entered a recession in the first quarter, may be in for a rough ride. Gross domestic product shrank 4.6 percent from a year earlier in the second quarter, the most since 2009, after a 2.2 percent slump in the previous three months, the Federal Statistics Service said on Monday, citing preliminary data. Capital Economics Ltd. sees a downturn that will trough with a 6.3 percent plunge in the third quarter, while HSBC Holdings Plc predicts this year’s worst performance from October to December.
A steeper drop would run counter to assertions by government officials that last quarter marked “the lowest point” for Russia, with growth set to resume late this year or at the start of 2016. What’s setting the economy back is a renewed slide in commodity prices that saw crude drop to a six-month low last week, hammering the ruble and shaking a country that relies on oil and gas for about half of its budget revenue.
“I don’t see anything turning up for Russia right now,” said Charles Movit, an economist at IHS Global Insight in Washington who predicts the country won’t have its first full year of positive growth until 2017. The lower oil price “puts more pressure on the ruble and as the ruble depreciates, it pushes inflation. So that’s more of a squeeze on consumers.”
Urals, Russia’s export blend of crude, averaged $57 in the first half, down almost 47 percent from the same period a year earlier, according to the Economy Ministry. The ruble has depreciated about 44 percent in the past 12 months, the worst performance globally, according to data compiled by Bloomberg.
“If current oil prices remain, any improvement may be delayed,” Dmitry Polevoy, chief Russia economist at ING Bank Eurasia JSC in Moscow, said by e-mail. “Moreover, the risks of recession continuing in 2016 will grow.”
The GDP decline in the first three months was worse than all but five predictions in a Bloomberg survey of 18 analysts. Economy Minister Alexei Ulyukayev said on Tuesday that his ministry may revise its forecast for this year after last quarter’s performance came in worse than its estimate for a 4.4 percent slump.
The ministry, which currently projects a contraction of 2.8 percent in 2015, believes the economy will show improvement this quarter, Ulyukayev told reporters in Krasnodar, southern Russia. The central bank said last month that it may worsen its estimate for a 3.2 percent drop this year.
The rout on commodities markets may put the central bank in a bind if it destabilizes the ruble and reignites inflation. Consumer prices rose 15.6 percent in July from a year ago, down from a 13-year high of 16.9 percent in March. The central bank forecasts inflation at 10.8 percent by year-end and says its 4 percent target will be reached in 2017.
The Bank of Russia has lowered its benchmark by a cumulative six percentage points to 11 percent in five steps this year.
“The sharp drop in oil prices is clearly leading to rapid weakening of the Russian currency, which could pose a threat to financial stability,” Alexander Morozov, HSBC’s chief economist for Russia, said by e-mail on Monday. “As a result, the central bank may pause its interest-rate cuts to wait for stabilization on the oil and currency markets.”
The slump will stay within the range of 4 percent to 5 percent in the third quarter, with no improvement in annual growth rates likely until the final three months of the year, according to Deutsche Bank AG.
“The economic contraction was driven by the producer segment, especially in such areas as industrial production and construction,” Deutsche Bank analysts Yaroslav Lissovolik and Artem Zaigrin said in a research note. “Economic growth is likely to remain negative.”
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