Macro Analysis / Russia

Russia 2Q20 GDP shows upside surprise for investments and exports

  • Rosstat unveiled a breakdown of the 2Q20GDP contraction,which was driven by a 22.2% y/y decline in household consumption
  • Russia’s 2Q20 GDP contraction not as deep as 2Q09
  • Household income shock was the most severe of the three recent crises
Russia 2Q20 GDP shows upside surprise for investments and exports

Rosstat unveiled a breakdown of the 2Q20 GDP contraction, which was driven by a 22.2% y/y decline in household consumption, the sharpest contraction of the past three crises. At the same time, investments in fixed assets contracted by only 11.7% y/y and exports did not suffer as much as we had expected, posting a 0.3% y/y in real terms. That said, Russia is likely to owe these positive achievements to two factors: the large role of the state in investments and Russia’s growing exposure to China.

Russia’s 2Q20 GDP contraction not as deep as 2Q09: We now have details of the 2Q20 consumption and investment performance, which enables us to compare this crisis at the peak of the economic contraction with the two previous crises, one of 2009 and the other in 2015. Despite the unusual circumstances, the 2Q20 GDP contraction was not the worst of the three crises (see Tab. 1) and, as we have mentioned previously, Russia’s performance looks very strong versus the results delivered by other countries (see our note from 7 September, The Russian growth case). This seems to prove that the recent crisis was less painful than the crisis of 2009; this is translated into a consensus growth forecast of a 4% y/y drop for this year versus a 7.8% y/y contraction in 2009.

Household income shock was the most severe of the three recent crises: The fact that private consumption suffered more in 2Q20 than the two previous crises is not entirely surprising given the sudden shift in the format of consumption. Retail trade contracted by 16% y/y, in a way signaling the deep contraction in household consumption, which dropped 22.2% y/y in Q2. The scale of the consumption shock matches the scope of the real disposable income contraction, which declined 8.0% y/y in 2Q20, a stronger quarterly decline than the two previous crises (see Figure 1). The jump in unemployment also looks strong and comparable with the increase during the 2009 crisis when it increased from 6.8% in 4Q08 to 9.2% in 1Q09 and 8.4% in 2Q09: Russia entered the lockdown with a very low 4.6% unemployment rate (see Figure 2), which has now reached 6.4% as of August. On a positive note, the behavior of the banking sector was very countercyclical in 2020 and will provide serious support to consumers: the retail loan book increased 13% over the past 12 months versus a 6-10% contraction for the respective periods in 2015 and 2009.

Investment in fixed assets contracted by 11.7% y/y in 2Q20 – a positive result: While the decline in consumption was very deep and below expectations, investments have contracted by just 11.7% y/y, the same scale of decline which was seen during the 2015 crisis and much less significant that the contraction in investments during 2Q09. One explanation could be that the production segment suffered less than services and, thus, investment activity was less affected. However, it could also be that the relatively modest contraction in investment activity was related to strong state activity in the field of residential and infrastructural construction: this was indirectly confirmed by the lower-than-expected contraction in the construction sector (just -1,7% y/y in 2Q20) and also the fact that infrastructure projects were introduced as part of the national rescue package. The strong role of the state could be illustrated by the high concentration of investment growth in a small number of Russian regions. During the period 2000 to 2012, investment growth was spread broadly across the regions and there were on average 14 regions reporting investment growth for each region reporting an investment contraction, but since 2012 that trend has changed; in the last eight years, Russia has reported on average only 2-3 regions with investment growth for each region with a contraction in investment.

Export component remained strong, possibly showing a stronger focus on China: Another positive aspect pointed out by the 2Q20 statistics is the very firm performance of exports. In fact, given that the lockdown triggered a break in the global value chain and the consequences of the OPEC+ deal, we would expect a contraction in exports in real terms, similar to the scale of decline seen in 2Q09, i.e. of around 9% y/y. The 0.3% y/y reported growth for 2Q20 left export conditions in a situation similar to that of 2Q15 when the crisis was purely local, and came as a very positive result. We attribute this mainly to the growing trade links with China. In fact, Chinese industries were in negative territory for the first quarter only (see Figure 5) and since then they have reported an average of 5% y/y growth, which has probably supported demand for Russian industrial products. The balance of payment figures confirm the permanent shift East in Russian foreign trade: the share of Russian trade with China reached a historical high of 17% last year (see Figure 6), replacing the declining share of trade with European countries. That shift has proved a success story, at least for now.

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The contents of this document have been prepared by Joint Stock Company “Alfa-Bank” ("Alfa Bank") as Investment Research within the meaning of Article 36 of Commission Delegated Regulation (EU) 2017/5...

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