This morning we published, Russia Output & Demand – February; recession deepens, disinflation to strengthen. We present extracts from the front page below.
The recessionary dynamics deepened and broadened into February with domestic demand continuing to plummet while the supportive impact from the weaker RUB was gradually losing momentum. Consumer spending looks set to decline further, while the corporate sector has to slash capex deeper in the current deleveraging environment. Demand-pull disinflationary forces strengthened into February with nominal wages growth moderating and employment starting to fall.
Consumer spending continues to catch up with purchasing power. Last month households continued to adjust their spending patterns in an environment of shrinking income and unavailability of consumer credit. Thus, retail sales dropped 7.7% YoY in February and are now down some 6.4% from the pre-December spending spree levels. Households will still have to cut back deeper into discretionary spending to adjust it to falling incomes (wages are down 10% in real terms) and pay back consumer loans. Hence, consumer spending is likely to dip deeper under water throughout the year and we see downside risks to our -8.5% projection for 2015.
Private sector pressured to deleverage. The decline in FAI deepened only slightly in February to -6.5% YoY (vs. -6.3% in January). Homebuilding activity must have continued to prop up investment numbers – residential completions were up 48% YoY in February – as homebuilders have to complete the construction of housing sold on a pre-financed basis at the end of last year. In this light, non-housing investments must have continued to decline sharply. As suggested by our gross corporate debt financing index (bank lending and bonds on domestic and external markets) corporate deleveraging has intensified massively to the fastest pace ever.
RUB support for IP is losing momentum. Industrial production lost 1.6% YoY in February (from +0.9% YoY in January). Industries benefiting from the weaker RUB (food processing and metals & mining) and specific factors (pipeline, military complex) remained well supported, but the impact from plummeting domestic demand spills over into domestic-oriented industries.
Disinflationary demand-pull impulse is strengthening. Nominal wages growth continued to slowdown in February (to 5.2% YoY) and dropped to the 3-4% range in sequential terms. Moreover, moderation in wages growth broadened across the sectors with pay rises in the private sector slowing to 5.6% YoY (3.0% sequentially) in January. Declining economic activity has also started to infect labour statistics with employment (adjusted for the Crimea-related base effect) dropping 0.9% YoY in February.
More reasons to front-load rates normalisation. Overall, the report looks rather dovish from a policy perspective. Our GDP tracker suggests activity is down 3.5% YoY in February vs. 2.0-2.5% for 1H15 overall, expected by the CBR. Supply-side inflationary shocks have been almost fully absorbed in the level of domestic prices as seen in the sustained normalisation of the inflation run rate while demand-pull factors are strongly disinflationary.