Russia: Weak Activity Is Starting To Affect Budget Policy

Industrial output growth of 0.9% YoY in May and the structure of 0.5% YoY GDP growth in 1Q19 confirm weakness in economic activity and support our below-consensus 1.0% GDP growth expectations for 2019. As a result, an easing in the budget policy - in the form of investing state savings locally from 2020 - now looms on the horizon.

Industrial output weakens on calendar effect, restricted oil upstream and downstream, limited budget support, recovery possible in 2H

The material slowdown in industrial output from 4.6% YoY in April to just 0.9% YoY in May was mainly due to significant distortions for both months via the calendar effect and did not come as a shock to the market. Still, it was lower than the 1.6% YoY of consensus and close to our pessimistic 0.0-1.0% YoY expectations. The key observations:

  • Unlike April statistics, propelled by the additional workday (vs. April 2018), the May figure suffered from the reverse effect, with 2 work days less than May 2018. This effect might have trimmed 1-2 ppts from the growth rate. June, August and November will also suffer from adverse calendar factors. The majority of manufacturing sectors, which account for around 2/3 of the total industrial output volume, are the most affected by this;
  • Oil sectors, which should not have been materially affected by the workday factors, have also shown deterioration in dynamics in May: oil extraction growth slowed from 3.5% YoY in 4M19 to just 1.3% YoY in May, and the drop in oil supplied to refineries deepened from -0.6% YoY in 4M19 to -9.2% YoY in May. This could be explained by both Russia's OPEC+ commitments and possibly by disruptions in the oil throughput via the Druzhba pipeline (accounts for 20% of Russia's oil exports);
  • The most noticeable deterioration among the manufacturing sectors (that goes beyond the calendar effects) took place in the machinery and equipment segment, including car manufacturing and shipbuilding.
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