Russian macro: manufacturing to gain importance as a driving force
Russian industrial output grew by 1.2% y-o-y in March and contracted by a mere 0.9% y-o-y in 1Q23 versus a 3.0% y-o-y contraction in 4Q22. Seasonally adjusted industrial output grew in March by 1.3% m-o-m. In the previous months, industrial growth remained negative due to the base effect caused by the consequences of the special military operation that encouraged foreign producers to leave Russia. Even so, industrial production contracted moderately in 2022 (by 0.4%). This year, it will likely grow and be one of the main drivers of Russia's economic recovery.
The 1Q23 industrial statistics show that the mining segment contracted by 3.3% y-o-y, while manufacturing was up 1.1%. The former is likely to contract by at least 2.3% this year. Assuming other factors are equal, one should not yet expect a tipping point in 2023, given that a proper re-directing of energy exports from West to East will take time. As opposed to mining, the manufacturing segment has already bounced back as of 1Q23. After the y-o-y decline in January and February, it grew by 6.3% y-o-y in March and may grow by over 5% this year. Industry as a whole may grow more than expected earlier and could expand by at least 2.5% or so this year, which will result in stronger GDP growth.
As industry is one of the main taxpayers, tax collection is likely to improve. The Finance Ministry has already hinted that the budget may be in surplus in the remaining months of the year, implying that the massive federal budget deficit that emerged in the first two months amid advanced budgetary spending will shrink and may be lower than penciled.
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