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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