BOFIT Viikkokatsaus / BOFIT Weekly 2019/21

Preliminary Rosstat figures show Russian GDP growth in the first three months of the year was just 0.5 % y-o-y, a figure clearly lower than anticipated by most forecasts. At the end of 2018, the Central Bank of Russia forecast growth in the range of 1–1.5 %, while the responses of analysts interviewed by Bloomberg averaged 1.2 %. Even Russia’s economic development ministry, which updates its forecast monthly, expected 0.8 % growth.

The Russian economy last grew as slowly in the fourth quarter of 2017. The slowdown in growth from 4Q18 (2.7 %) was, however, expected due to low growth in domestic demand. The value-added tax increase introduced at the beginning of January appears to have boosted wholesale trade at the end of last year in anticipation of higher VAT rates. Wholesale activity in the first quarter of this year contracted by 7.4 % y-o-y, even as retail sales rose by 1.8 %. Besides the larger-than-expected impact from the VAT hike, observers also point to weak economic development relative to previous years due to a reduction in defence materials orders and a milder-than-usual winter that reduced energy consumption and gas exports.

Inflation (5.3 %) negatively impacts general income levels. Rosstat estimates that real incomes fell by 2.3 % y-o-y in the first quarter. Industrial output rose by 2.1 %.

The CBR and the business press believe the growth slowdown is temporary. In the most hopeful scenarios, the launch of large state investments in national infrastructure, healthcare and education at the end of the year will spur higher economic growth next year.