Russian growth in 2020-2021: a relatively smooth trajectory, albeit uneven across sectors
Last month some international organizations such as the World Bank, OECD, IMF, updated their 2020-2021 forecasts and turned less optimistic. The global recession in 2020 is now seen a bit deeper, while the rebound in 2021 looks less robust and more prolonged. Russia looks quite unimpressive amid such a backdrop as well, as the World Bank expects the Russian economy to shrink by 6.0% in 2020, while the IMF sees the recession deeper (at 6.6%) and the OECD projects an 8.0% to 10.0% GDP contraction this year. Russian authorities, such as the CBR and the Economics Ministry, see the 2020 recession more moderate.
The recently published Russian statistics for 1H20 did not alter our previous 2020 forecast, however, the range may now be narrowed. It now appears unlikely that Russia’s contraction could be deeper than 5.5% this year.
Our current baseline scenario differs little from our earlier view as a whole, apart from some details, such as weaker performance in the mining sector, better performance in the construction sector, and therefore in investment activity overall. Similarly, retail sales and household consumption are set to shrink less in 2020. As a result of such developments, even though net exports are not expected to grow as much as was thought earlier, they will still somehow offset the weaker growth of domestic demand. Overall, Russia’s aggregate output growth will follow a relatively smooth trajectory, such as a less deep contraction in 2020 as a whole and rather moderate growth in 2021. Currently we anticipate Russia’s GDP to expand by 2.9% next year.
* The 2021 growth outlook looks more certain, albeit forecasters’ estimates vary. The IMF expects Russia to bounce back by 4.1% next year. The Economics Ministry is less optimistic and expects the economy to grow by 3.2% next year, while the World Bank is even more cautious (2.7%). However, there is still a great deal of uncertainty that stems directly from the effect of Russia’s restrictions on domestic activity associated with the pandemic, but the global environment seems to be quite uncertain as well, such as demand for energy and global trade overall.
* The Russian mining sector was hit badly in May and June, which brought the 2Q20 tally down 10.3% y-o-y, the OPEC+ deal is still in place, and it looks as though easing the agreed production cuts may be very gradual. The mining sector was down by 5.2% y-o-y in 1H20. For the full year, the figure is likely to be down by 8% or even more.
* This Friday the CBR will make a decision on its key rate and simultaneously publish its updated macroeconomic forecast. The latter may play a more significant role for the market than the former. Investors still think that the CBR has space for further softening of monetary policy. However, the future trajectory of the key rate is unclear, and hence the market is waiting for a certain signal from the regulator, and in this sense updated CBR forecasts may be used as a source of additional information.
* Apart from that, the regulator is going to disclose the new estimation for the so-called “neutral” key rate range. The range for the neutral rate can be announced at 5-6% in nominal terms. At the same time, a further downward revision of the range is still possible – for example, if either Russia’s risk premium or the inflation target decline.
* The regulator is likely to keep its rhetoric dovish, which will support demand for ruble bonds, now largely coming from domestic banks and concentrated in RUONIA-linkers.
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