Kremlin’s Growth Hopes Face New Headwinds as Economy Sputters

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The Russian government’s hopes for a pickup in growth in the second half are looking increasingly optimistic amid declining consumer demand and business activity.

Real incomes fell 0.2% in the second quarter from the year before, the Federal Statistics Service said Wednesday, bringing the drop in the first half to 1.3%. Despite that weakness, retail sales rose 1.4% in June, slightly above expectations.

“There are a lot of worrisome signals from the second quarter,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said before the latest release. “My forecast for the year is for 0.8% growth, but if there are no improvements in the second half, even this may be unattainable.”

Earlier releases showed car sales continued to fall last month, and business activity contracted for the first time since 2016. Exports fell 14% in May from a year ago, coming in below estimates.

Kremlin’s Growth Hopes Face New Headwinds as Economy Sputters

Under pressure to deliver on growth following five years of falling incomes, government officials have been insisting that the economy will perk up in the second half as spending kicks in on a $400 billion infrastructure program. But economists say that optimism may have been premature as the global slowdown adds to Russia’s domestic woes.

Analysts at JP Morgan Chase & Co. cut their full-year growth forecast for Russia to 1% from 1.2% earlier this month, citing slowing momentum and negative sentiment from a worsening global outlook.

What Our Economists Say:

“Leading indicators suggest it’s more than soft consumer demand weighing on growth. Most worrying are the gauges for new orders, which suggest Russia isn’t immune to a slowdown in activity abroad.”

--Scott Johnson, economist, Bloomberg Economics

The economy expanded 0.8% in the second quarter from a year ago after a 0.5% increase in the first quarter, according to the median of forecasts in a Bloomberg survey. President Vladimir Putin promised when he was re-elected last year to deliver growth of more than 3% per year by the middle of the next decade. For this year, the Economy Ministry is targeting growth of 1.3%.

Not all the data point to a bleaker outlook: notoriously volatile industrial production numbers came in stronger than expected for June.

Kremlin’s Growth Hopes Face New Headwinds as Economy Sputters

Rising concern about growth has caused some tension between Russian policy makers in recent weeks, with the Economy Ministry blaming the central bank for not doing enough to promote economic expansion. The Finance Ministry has suggested spending some of the money stockpiled in a wealth fund to fuel growth.

Bank of Russia Governor Elvira Nabiullina used her opening speech at a recent conference to insist that Russia needs structural reform, not easy money to fix its growth problem.

“Some improvement may happen in the second quarter due to state spending, but the spending will be the only driver,” said Vladimir Tikhomirov from BCS Financial Group in Moscow. “No improvement in consumer demand or incomes is seen anywhere on the horizon.”

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