Consumer Plays Catchup as Russia Gets a Break From Inflation

  • Real wages, disposable incomes curb their decline in November
  • Annual drop in retail sales is worse than estimated at 13.1%

As industrial production capped its sixth month of improvements in November, there’s some catching up to do for the Russian consumer.

The collapse of household finances moderated in November after inflation slowed every month since August. Real wages slumped 9 percent from a year earlier, the least in three months, after a revised 10.5 percent drop in October, the Federal Statistics Service in Moscow said Thursday in a statement. That was less than the median estimate for a 10.2 percent plunge in a Bloomberg survey of 18 economists. Even so, a drop in retail sales unexpectedly accelerated and unemployment rose more than forecast.

A recovery in incomes will help draw a curtain on a period that saw the biggest drop in consumption under President Vladimir Putin, who said during his annual news conference Thursday that Russia’s passed the worst of its economic crisis after last year’s currency collapse and a slide in oil prices. The central bank, which last week extended its interest-rate pause to three meetings, said “modest” growth in household incomes will continue to hold back consumer spending.

“Russia is moving out of the recession at a snail’s pace,” Piotr Matys, a strategist for emerging-market currencies at Rabobank in London, said by e-mail. “The underlying trend is still fairly weak, especially in the case of domestic demand, as reflected in the ongoing contraction in retail sales and investments. The latest economic indicators also keep the bias skewed in favor of resuming the monetary-policy easing cycle to reduce the burden on the economy.”

Longest Recession

With the country at risk of the longest recession in two decades, millions of Russians are sinking into poverty after the government allowed household finances to bear the brunt of the country’s first economic contraction in six years and responded to the crisis with spending cutbacks and a free float of the ruble. This year, 21.7 million people, or about 15 percent of the population, are living beneath the subsistence level, according to the Federal Statistics Service.

“Consumer demand will continue to deteriorate over the coming months, as the
government doesn’t have adequate resources to support incomes as in 2009,” Olga Sterina, an analyst at UralSib Capital in Moscow, said in a report. “Demand is unlikely to improve until the second half of 2016, when the economy could show its first signs of recovery.”

Sales, Incomes

Retail sales plummeted 13.1 percent from a year earlier in November, exceeding the 11. 5 percent median forecast of economists. Disposable incomes fell 5.4 percent after a downwardly revised decline of 5.3 percent. Unemployment rose for a second month to 5.8 percent from 5.5 percent in October.

The figures reflect the high base effect of consumer data in November and December last year, when shoppers snapped up goods out of concern that the ruble’s crisis will wipe out their savings, according to Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki.

As Russia relinquishes a growth model that relied for a decade on consumer spending, a parliamentary election next year and a presidential ballot in 2018 mean a shift to a new economic paradigm will probably be made easier by the indexation of public-sector salaries and pensions, according to Alfa Bank analysts Natalia Orlova and Dmitry Dolgin.

‘Smooth Transition’

“Despite the serious concerns about Russia’s ability to keep continuing consumption growth, the electoral cycle of the next two years will bring a very smooth transition,” they said in a research note last week. “After 2018 we expect a more radical deterioration of consumers’ position.”

The 10-stock Micex Consumer Goods & Services Index has gained 25 percent this year, underperforming the broader Micex Index, which is up more than 27 percent. The ruble has weakened more than 7 percent against the dollar in the past month, the second-worst performer among 24 emerging-market currencies tracked by Bloomberg after Argentina’s peso.

Annual inflation, which declined for a third month in November to 15 percent, is set to decelerate to 7.5 percent to 8 percent in the first three months of next year, according to the central bank. The Bank of Russia has held its benchmark at 11 percent since July as it struggles to bring inflation near its medium-term target of 4 percent.

Rate Outlook

The key rate will end next year at 8 percent, according to the median of 23 forecasts. While the central bank may remain on the “sidelines for some time,” the case for monetary easing in January may get a boost from any further negative economic surprises if the ruble remains relatively stable, according to Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow.

“The domestic economy renewed its slide in a search of a bottom after some stabilization in the third quarter,” Polevoy said. “Putin’s relatively optimistic tone during his press conference about the state of the economy was markedly shaken by the hard data.”

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