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September economic report: mixed; stronger consumption unlikely to be sustained amid shrinking wages


On Friday, Rosstat published its regular monthly package of statistics for September.

Unemployment rate: 4.9% (vs. 4.8% in August and 5.0% Bloomberg consensus); while SA UR was flat at 5.2%.

Fixed capital investments: -2.8% YoY (vs. -2.7% and -2.5%).

Retail sales: +1.7 % YoY (vs. +1.4% and +1.5%).

Construction: -4.4% YoY (vs. -3.4% a month ago).

New houses: +7.8% YoY (vs. +10.7% a month ago).

Real wages: -1.0% YoY (vs. -1.2% (revised down from +1.4%) and +1.2%).

Agriculture: +16.6% YoY (vs. +4.6% a month ago).

The autumn started with a mixed picture: while the monthly data implies that the Russian economy might have avoided a technical recession in 3Q14, the fundamentals got worse, with real wages sliding into the red. Looking through to the year-end, the steep plunge in the rouble and falling oil prices are set to squeeze domestic demand. However, if i) the delayed effect from the massive increase in defence orders; ii) the Power of Siberia pipeline construction; and iii) import substitution all continue to progress, FY14 growth might come in higher than zero.

Resilient consumption backed local demand. Local demand benefited from some relief in household spending, despite the persistent investment contraction (in light of the boom in the housebuilding industry dying out). Despite negative growth in real wages (the latest available statistics showed that public wages were the most hit, with nominal growth printing just near 3% YoY in August) and deteriorating retail lending, retail sales edged up to 1.7% YoY in real terms on the back of a four-month high gain in discretionary spending. This improvement might be explained by:

- the cash-for-clunkers initiative spurring a recovery on the car market, where the decline in car sales softened from 25.8% in August to 20.1% YoY in September, according to AEB. This could have added near 0.6pp to the increase in non-food purchases last month (+0.9pp to 3.5% YoY);

- RUB weakness might have pushed households to rush for imported goods, as in March.

In the short term, we might see a further improvement in both factors, but a consumption slowdown is all but inevitable once these supportive effects dissipate in the coming months.

Net exports weather impact on economy. On a brighter note, owing to the record-high harvest this year, agriculture jumped 16.6% YoY in September, bringing full-quarter growth to 11% YoY, which might have added near 0.5pp to GDP growth in 3Q14. That said, after a one-month break, IP strength returned to the spotlight on the back of i) transportation machinery (not disclosed, we suppose it could be military-oriented); ii) some recovery in oil output; iii) import substitution in food industries; iv) blips in oil refining and chemicals; and v) construction of Power of Siberia (not only did pipes output register a multi-month 23% YoY gain, but construction-related materials also signalled some recovery). All these together suggest net exports will continue to cushion the impact from slowing local demand.
Daria Isakova, Vladimir Kolychev
VTB Capital analyst

Rosstat, Russia

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