Macro Analysis / Global

Russia Macro Insights: Revising down GDP forecast on weak April retail trade

  • We revise down our GDP forecast on weak April retail trade
  • Russia’s retail trade dropped by 23.4% y/y in April
  • We have cut our 2020 GDP expectation to -3% y/y

Retail trade dropped 23.4% y/y in April, well below the 18% y/y market consensus: Retail trade dropped by 23.4% y/y in April, well below our 15% y/y expectation and the 18% y/y consensus forecast. This figure was also worse than the 20.5% y/y decline in retail trade reported in China for February and the 16.4% y/y contraction in US retail sales in April. At the same time, the deeper drop in Russia’s trade could be due to the low penetration of ecommerce trade: for instance, in China the share of e-commerce is already above 30% of total retail trade while in Russia it is assessed at 4.5%. Given this sharp decline and the continuing lockdown through May we believe that this month the contraction in retail trade will reach 19% y/y. The continuing lockdown is causing a deterioration in the outlook for 2Q20 and we now expect retail trade to contract 17% y/y for 2Q20. In addition, the longer the lockdown stays in place, the higher will be bankruptcies in the SMEs segment and, thus, the stronger will be the pressure on personal incomes. Rosstat has reported unemployment at just 5.8% in April; it is hard to interpret this as a sign of good household financial health but rather as a signal that the majority of companies have forced their employees to take holidays at their own expenses. In any case, we expect the main pressure on consumption to materialize via a decline in personal income rather than via unemployment growth; our current 5% y/y expectation for a decline in real disposable income is a reality check. 

Contraction in retail lending is an additional factor setting pressure on consumption: An additional negative factor for the consumption pattern is the fact that the retail loan book of Russian banks started to decline from April and continues to contract in May. According to the CBR’s most recent information, retail loans were down 0.7% m/m in April followed by a 0.4% MTD contraction in May; as of end-May, the retail loan book could be down by RUB300 bn from its peak in March, an amount which represents around 0.5% of annual revenues of Russian households. 

Industrial production posted a modest decline in April of 6.6% y/y, supported by a modest 2.3% y/y decline in construction: Very poor consumption results contrasted with the relatively firm industrial output performance. In April, industrial production declined by just 6.6% y/y, including a 10% y/y decline in manufacturing output but a much weaker 3.2% y/y contraction in commodity extraction. One of the reasons of this relatively good result is that construction was firm and contracted by just 2.3% y/y – we consider this being the main support factor for local producers. While industrial production figures generally came in line with the guidance for energy consumption, which we tracked on a daily basis and which posted a 3% y/y contraction in April, we are now worried about its performance in May. Energy consumption points to a 5% y/y decline for 1-25 May, which we see as guidance for lower production activity this month. We, thus, expect industrial production to post a 9% y/y decline in May. 

We now expect GDP to contract 3% y/y under an assumption of a 75 bp CBR rate cut on 19 June. An extension of the lockdown, a deeper-than-expected decline in retail trade in April and signs of a sharper contraction in industrial output in May force us to downgrade our 2020 GDP forecast from a 1% y/y contraction to a 3% y/y decline. April’s data should also push the CBR to act more aggressively. As inflation stays at 0.1% MTD (as of 19 May), we see a 75 bp rate cut on 19 June now becoming a base case scenario.

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Macro Analysis / Russia

Russia Macro Insights: Strong start to the year, growing concerns for future

  • Macro stats Q1 20: Strong data with a 4.3% yoy increase in retail trade and 1.5% yoy increase in industrial production
  • Real disposable income posted a 0.2% decline in Q1 20, unemployment remained low at 4.7% in March
  • Strong start to the year does not allay worries about the coronavirus crisis
Natalia Orlova @
28 April 2020

Russia has reported strong 1Q20 data with a 4.3% y/y increase in retail trade and 1.5% y/y increase in industrial production. However, real disposable income posted a 0.2% y/y decline for 1Q20, pointing to a growing social cost from the crisis.

Retail trade grew 4.3% y/y in 1Q20, driven by a 5.6% y/y jump in March: Retail trade growth was reported at 5.6% y/y in March, exceeding the 1.9% y/y consensus forecast and our 4.0% y/y expectation. The stronger-thanexpected figure implies that the scale of panic demand was stronger than we had initially thought; the flip side of the fast spike in demand could, however, be stockpiling by the population ahead of the lockdown, signaling a largerthan-expected weakness in retail spending in 2Q20. Given the strong March data, retail trade growth was reported at 4.3 y/y in 1Q20, the strongest growth since 4Q12. 

Real disposable income posted a 0.2% decline in 1Q20, unemployment remained low at 4.7% in March: The key worry from the 1Q20 statistics is that Rosstat reported a real disposable income decline of 0.2% y/y in 1Q20. This figure needs to be put in context to make judgement on it: in 2019, real disposable income grew 1.0% y/y, delivering an acceleration in income growth, which was seen as an important KPI of the new cabinet that was appointed in January 2020. As a result, we initially had expected real disposable income growth to accelerate to 2.0% y/y this year, a forecast which is clearly no longer realistic. However, the fact that real incomes were in negative territory already in 1Q20 reflects that the trend had started to weaken before the lockdown took effect. The unemployment of 4.7% posted in March, virtually unchanged from the 4.6% level in February, confirms our view that in Russia the spike in unemployment is a much lesser risk than the threat of a substantial drop in real disposable income this year. 

Rapid deceleration in industrial production growth to 0.3% y/y reported in March: By contrast to the retail segment which came strong, industrial production growth reached just 0.3% y/y in March, implying a deceleration from the 1.5% y/y average growth for 1Q20. Given that industrial production growth was 3.3% y/y in February and possibly persisted through the first three weeks of March, the full-month figure for March suggests that the decline in activity during the last week of March, i.e. the first week of the lockdown, was around 10% y/y. Our take is that this suggests the scale of decline in economic activity in April may be in the region of 10-15% y/y. 

Strong start to the year does not allay worries: The good start to the year in retail trade provides some support for the 2020 growth outlook, however it does not allay concerns over Russia’s ability to navigate through the lockdown. The main forecast benchmark is the 2008 crisis: Russian GDP dropped 7.8% in 2009 versus a 0.1% global contraction. Macro management has changed for the better since then. Russia now still has large reserves and low debt, and on top of that it now has a flexible exchange rate regime. Russia runs a low share of SMEs in the economy and there is a low population concentration in big cities which helps. At the same time, challenges are growing. Under declining oil prices, the Russian cabinet’s rescue package is considered to be small by comparison to the rescue packages from around the world; real disposable income is 10% below the level of 2013 and broken hopes for improvement could hit economic confidence. There are growing fears that the national projects, a pillar of Russia’s growth case for 2019-24, will come under pressure from the growing importance of the social challenges.

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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
Natalia Orlova @
22 June 2020

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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Macro Analysis / Russia

Macro Insights: Russia lockdown – April figures takeaways

  • Available statistics paint a mixed picture of the Russian macro case in April
  • Russian GDP growth of 1.8% yoy in Q1 20 confirms a soft entry to the Covid-19 pandemic
  • Railway loading decline of 5.9% yoy in April points to the strength of external demand
Natalia Orlova @
15 May 2020

Available statistics paint a mixed picture of the Russian macro case in April. With energy consumption down only 2.5% y/y last month and railway loading declining by 5.9% y/y, we ascertain that the industrial sector has navigated this crisis relatively well and that external demand did not collapse too much. The gradual easing of the lockdown regime, which took place de facto, and is tracked by the Yandex Mobility Index, should also play in favour of better-than-expected April growth data. At the same time, we see growing risk in the financial position of Russian households: an increase in official unemployment and a 0.6% m/m decline in retail loans in April point to serious concerns over a recovery in final consumption.

Russian GDP growth of 1.8% y/y in 1Q20 confirms a soft entry to the Covid-19 pandemic: Although the April macro statistics will not be available until 26 May, the entry point to the Covid-19 pandemic matters a lot. The Economy Ministry has assessed Russia’s 1Q20 GDP growth at 1.8% y/y, comparable to the 2.1% y/y reported for 4Q19. In fact while in 4Q19 Russian result was rather average, country’s 1Q20 looks very positive versus many other countries that underwent lockdowns. For instance, in the EU area, economic activity dropped substantially below expectation (France and in Spain), pointing to the risk of additional downgrades of their 2020 outlooks (see Figure 1) - this could be an important input of economic sentiment.

Railway loading decline of 5.9% y/y in April points for the strength of the external demand: April had been expected to be the worst month for Russia so far this year due to the combination of a freeze in local demand and global lockdowns. However, the operating indicator which we track to assess the strength of the demand – i.e. the Russian railway network loading – was not particularly bad. Railway loading volumes were down only 5.9% y/y while we had expected a 10% y/y decline (see Figure 2). April’s decline was not substantially worse than March’s 5.5% y/y contraction in loading and the 3.8% y/y decline in 1Q20, which coincided with continuing growth in Russian GDP. We attribute this relatively good April result to the recovery of Chinese’s trade flows which, apparently, compensated for the decline in trade flows in the European direction. In fact, Russian Railway’s posted a 10-12% y/y decline for internal loading volumes while an increase of 2-3% y/y was reported for export loading.

Other highlights: 

  • Energy consumption was down only 2.5 y/y decline in April
  • Yandex Mobility Index de facto reflects that the lockdown has eased since mid-April but Moscow remains tightly quarantined
  • Increase in unemployment and decline in retail loan book in April a concern for recovery in final demand in May-June

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Macro Analysis / Pakistan

Pakistan inflation: CPI remains close to 8% in May 2020

  • National CPI inched lower to 8.2% yoy in May 2020 vs. 8.5% yoy in April; second month of single-digit inflation
  • Disinflation likely to remain entrenched, particularly after reduction in June petroleum prices amid global headwinds
  • NCPI (avg) 11.0% in Jul-May’20 (within SBP projected range of 11-12%), where real interest rates are now nearly zero
Yusra Beg @
Intermarket Securities
2 June 2020

Pakistan's National CPI inched lower to 8.2% yoy for May 2020 vs. 8.5% yoy in April. Urban CPI decelerated to 7.3% yoy vs. 7.7% in April while Rural CPI remained sticky at 9.7% yoy vs. 9.8% yoy in April. This takes the 11-month National CPI average to 11.0%. Both Urban and Rural Core inflation crept lower to 5.4% yoy and 6.4% yoy (vs. 6.2% yoy and 7.4% yoy respectively in the previous month). 

A sharp rise in potato, pulses and wheat product prices was countered by decline in prices for tomato, onions and other fresh vegetables. Urban food inflation therefore remained largely stable at 10.6% yoy (vs. 10.4% yoy in April). Rural food inflation rose to 13.7% yoy (vs. 12.9% yoy).

Other reasons for the soft CPI readings are: (i) base effect in other major heads, (ii) yoy decline in petrol and LNG prices dragging down the Transport index (Urban/Rural: down 9% yoy and down 7% yoy). Inflation in Housing & Utilities and Education indices was modest at 6.5% and 1.9% yoy respectively for Urban.

Inflation in FY 21 is expected to average towards the lower-end of the indicated range of 7-9%. Disinflation is likely to remain entrenched, particularly after reduction in petroleum prices for June amid global headwinds (petrol and diesel prices reduced 4-5% previously in March). That said, early onset of locust swarm attacks suggest a spike in essential crop prices in Sindh and Punjab may occur in the future.

The SBP has reduced the policy rate by 525bps so far in CY 20 to 8.0% to counter the expected negative economic impact of the Covid-19 pandemic. In the event that inflation remains sticky at 8%+, the upcoming monetary policy meeting may see the central bank holding off on further cuts for now. Note that National CPI has averaged 11.0% in the July-May period (within the SBP projected range of 11-12%), where real interest rates are now nearly zero. The SBP forecasts CPI to average in the 7-9% range in FY 21.

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