Macro Analysis / Russia

Russia: Industrial production fall poses risk to unemployment, income in H2 20

  • Industrial production dropped 9.6% yoy in May despite budget expenditures growing 26% yoy in 5M 20
  • May retail trade dropped 19.2% yoy as expected; salary pattern and 6.1% unemployment surprised on the upside
  • Cost cutting by large companies is the main risk for Russia in H2 20

Russia’s retail trade dropped 19.2% y/y in May, which is not surprising, in our view, considering the longer-than-expected lockdown. The 1% y/y increase in nominal salaries in April and 6.1% unemployment rate in May were a positive surprise, confirming our disappointment with the 100bps CBR rate cut. The pause in the policy rate cut cycle, signaled by the CBR on Friday, and a strong ruble leave large Russian companies with a high level of uncertainty, which could push them to focus on cost-cutting in 2H20.

Retail trade dropped 19.2% y/y in May in line with our expectations: Retail trade dropped by 19.2% y/y in May which came well below market expectation of 17% y/y contraction, but in line with our expectation a 19% y/y drop. This points to some recovery from the 23.2% y/y revised decline in retail trade in April, however the figure remained weak due to the continuing lockdown in Moscow and a number of other regions during May. Light vehicle sales were down 52% y/y in May, just a modest improvement from 72% y/y collapse in April. Another important observation from the retail trade data is that, as a result of the lockdown, the share of food in the food plus non-food consumer basket jumped to 55% in May, well above the 48% average seen in 2019 – at the moment it remains unclear if this a temporary shift due to the lockdown, or if it is already a showing sign of increasing poverty.

Salary pattern and 6.1% unemployment surprised on the upside: While the strong contraction in retail trade is not surprising, the unemployment figure for May has surprised on the upside. While we did not rule out that this indicator should go to 6.5-7.0% level given that the size of officially registered unemployed continues to increase at a scale of 0.7mn people per month, Rosstat has reported the unemployment rate at just 6.1% y/y, which is very low versus the 13% unemployment reported in the US. Another positive surprise is that nominal salaries reported for April continued to increase by 1% y/y, which translated into a 2% y/y contraction in real salaries. All in all, the income side seems to perform in line with our expectation of a 5% y/y contraction in real disposable income for 2020, which we see being positive. Both salary growth and unemployment figures confirm our disappointment with a 100bps rate cut by the CBR last Friday, which looks too steep for us.

Industrial production dropped 9.6% y/y in May despite budget expenditures growing 26% y/y in 5M20: The fact that the industrial production slid into a deeper contraction in May, below the 6.6% contraction in industrial production reported for April, was a negative part of the Russian growth story last month. We believe that the poor May results was mainly due to the new OPEC+ agreement on production cuts which caused a contraction in Russian oil extraction of 13.5% y/y in May versus a 3.2% decline reported for April. As for manufacturing, output contracted by 7.2% y/y in May versus a 10% y/y decline reported for April. That said, the Russian federal budget expenditures growth of 26% y/y in 5M20 versus 24% y/y in 4M20 shows strong fiscal stimulus but the IP growth response was very weak. Additionally, our concern is that electricity consumption was down 6% y/y in June after declining only 5% y/y in May and 3% y/y contraction in April, implying that industrial output is unlikely to deliver a stronger recovery in June.

Cost cutting by large companies is the main risk for Russia in 2H20. According to the Economy Ministry Russian GDP contracted by 10.9% y/y in May after being down 12% y/y in April; this implies that 2Q20 GDP will contract by around 9% y/y which we see being rather positive. At the same time, there are growing risks that the recovery in 2H20 could be weaker than we initially expected. First, there are no longer hope to supportive economic policy: the CBR last Friday has guided the market for a possible pause in the rate cut cycle. The ruble exchange rate is much stronger than we had expected it to be these days. The fears of a second wave of pandemic are dominating the markets and industries. Our concern is that the high level of uncertainty will trigger large companies to optimize their costs and generate higher pressure on income and unemployment in 2H20. While the beginning of Covid-19 pandemic was associated with SME risks, it could now be that the recovery will be delayed due to potential cost-cutting from large corporations.

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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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