Although GDP growth in YoY terms came above expectations, it still suggests significant moderation is underway with the sequential pace of growth dipping well into the negative area: -0.5-1.0% QoQ SA, depending on the seasonal adjustment technique.
Nevertheless, the favourable base (lowered after recent revisions) as well as resilient consumer spending (on Olympics spending and the FX-fuelled rush for foreign branded produce) seems to have propped up growth in 1Q14, cushioning the pace of economic slowdown. Business spending, in contrast to consumer, was very fast to react to heightened uncertainty and tighter funding conditions as can be seen in a hefty 4.8% drop in fixed asset investments in 1Q14. As for net exports, our thinking is that although exports are likely to have dropped slightly, the decline in imports (on softening domestic investment demand along with currency weakness) helped to keep the contribution from net exports in the positive area.
We are looking for domestic demand to continue on a decelerating path, dragged by a decline in business spending and slower consumption. A weaker RUB will likely help to strengthen rebalancing towards the greater role of net exports (import substitution), but this is unlikely to lift growth in the short term – we see a technical recession in the coming quarters and 0.0% GDP growth in 2014 with risks tilted to the downside.