Early indicators in recent months imply that the supply-demand dichotomy might have returned after a short one-month break. On the one hand, car sales crashed 23% YoY in June, which along with persistently shrinking non-CIS imports signals a deteriorating performance on the local demand side. The orders inflow outlook looks sluggish, as cooling wages and retail lending weigh on household’s capacity to spend, while depressed business confidence and tight borrowing conditions take their toll on businesses’ investment plans.
On the other hand, manufacturing output gained momentum in July thanks to import substitution, but its magnitude is likely to be too moderate to steer the economy away from mild recession in 2H14.
On the inflation side, the biggest question is still how strong the inflationary impact of the recently imposed food ban would be. To remind, the previous week did not reveal a meaningful effect, coinciding with our expectation that it would take several weeks to translate into final consumer prices. Looking into the autumn, we believe that meat, fish and dairy products will likely be the first to reflect a price shock, while the fruit and vegetable part of the CPI basket seems to be relatively immune to the food ban for the time being thanks to the strong local harvest and beneficial geographical diversification of importers.
Outside Russia, investors will likely be watching the July CPI report from South Africa, where the headline is expected to have edged down to 6.6% YoY from a 5-year high of 6.8% YoY in May-June. According to SABR, the pass-through from the weaker rand has started to fuel retail prices, while wage inflation remains elevated. That said, there is a possibility that, given global food deflation, pressure from the food CPI component might somewhat ease near term.