Russian retail spending has climbed to a 3 year high despite the global market volatility of recent months and the spectre of the Eurozone debt crisis, with analysts saying it could remain firm through to the end of the year.
Retail spending data released the Federal Statistics service showed September spending up 9.2% year on year, after a 7.8% gain in August, with real wages rising 6.2%.
Not all doom and gloom
UBS analysts Dmitry Vinogradov and Bella Rabinovich believe the economy could be supported by increased consumer spending and industrial activity in construction sector
“We believe essentially two things lag in Russia: fiscal spending and construction, the flip side is that with public spending growth essentially slowing to zero, consumption growth has decelerated. Given the guidance from the Ministry of Finance on the size of the Reserve Fund at the end of the year, government spending has to increase. Construction growth trends are also not all doom and gloom. In relative terms, Russia actually fared better than its Eastern European counterparts. Furthermore, the industry recently returned to growth, posting 12.4% and 17.6% y-o-y growth rates in August and July, respectively.”
Despite recent market volatility many analysts believe that growth momentum could continue, provided the Eurozone debt crisis doesn’t cripple markets further, with output growth reaching a year high 6.5% in August, when retail sales were up 7.8% and wages up 3.8%, pushing disposable income higher. Bank lending volumes have continued to climb with Sberbank seeing lending portfolio growth of 3.7% ion September after 3.3% in August, and fixed capital growth in August was also up 6.5%
In general, the most recent statistics on Russian banks suggest that consumers and corporates are actually willing to spend. Vinogradov from UBS, said, this behavior could change quickly if oil prices fall, but this scenario has not yet materialized.
“Our macroeconomists expect higher y-o-y growth in 3Q-4Q11 given stronger consumption and public spending, a pick-up in credit growth, and, not least, positive base effects stemming from poor growth in 2H10, which was depressed by severe drought. Stronger GDP growth in 2H11 should alleviate some short-term concern, but it would still leave full-year 2011 growth at little more than 4% – a good result that nonetheless could have been significantly better given the sharp contraction in 2009.”
Robust consumption/Firming investment
Dmitry Polevoy and Egor Fedorov, analysts at ING bank, say that if the government continues to run a fiscal surplus, monetary policies are more efficient, and liquidity pressure is less acute.
“With inflation set to be low to mid-2012, the CBR is likely to become more dovish. The rouble is more flexible and the CBR less FX-focused, so the rouble continues to see upside under a positive Current Account balance, and our higher EUR/USD expectations, the liquidity picture will still be drawn by MinFin and CBR action as the 2 trillion rouble fiscal surplus in 7M11 was a drag. It will reverse its effect in 2H11, likely securing rouble liquidity at comfortable levels and MM rates at the CBR bid.
We estimate consumption and investments together added 4.2ppt in 2Q11, but net exports had a negative 3ppt effect, so inventories again played an important role. We still believe in a robust consumption/firming investment story for 2H11-2012. Lower YoY imports are likely to reduce the net exports effect, but the ‘private demand-imports’ link impedes growth.”
Risk
UBS analysts Dmitry Vinogradov and Bella Rabinovich, note that even with high commodity prices the economy has seen sustained capital outflows and weak domestic investment, and the growth slowdown after 1Q 2011 means more needs to be done to boost the investment climate.
“Fiscal vulnerability is one of the key risks to Russia’s investment case. One of the main area of concern that makes Russia’s investment case less appealing is the significant deceleration in growth in 1H11. Real GDP growth slowed to 4.1% in 1Q11 and 3.4% in 2Q11. Given the size of the economic contraction in 2009 and the level of oil prices in 1H11, those numbers are hardly inspiring.”
They say that Russia’s experience of capital outflows and the drying up of credit markets is common to other emerging economies in Eastern Europe, with Russia’s central bank playing a key role in boosting domestic liquidity.
“The reduced access to external FX financing and bond issuance on the corporate and banking sector front resulting in more funding in local currency to pay down the FX debt along with some seasonal distortions and accelerated tax payments draining liquidity, possible liquidity demand from Greek banks exposed in the region put a sustained pressure on the Euro zone banking System. Thus again, local market liquidity will be dependent on any global Central Bank action, especially given an important part of the constraints come from reduced access to external financing.”
Vinogradov and Rabinovich, at UBS, say the rate of further stabilization in economy and real sector growth will depend on structural reforms addressing a broad range of issues, including privatization, corporate governance, developing financial institutions and stimulating foreign investment activity.
“In the wake of the sharp market decline, the outlook now looks more balanced, but we remain defensive. The rebound in the Russian equity market may continue, but conviction is likely to remain low, volatility elevated and range-trading to prevail. In the short term, growth rates are set to pick up, driven by higher consumption and public spending. Longer-term growth prospects depend on whether the new government prioritizes reform.”