Russia: Slowdown but domestic resilience

Russia is less export dependent than many other eastern European economies, but is clearly affected by slow-growing Western Europe. Weak export is a sign of this but continued high oil prices continue to provide export revenue. At the same time the domestic economy shows resilience despite high inflation hitting household real income. Forward looking indicators such as PMI have weakened overall, down in December to 52.2, and the development with external weakness/domestic resilience is expected to continue in 2013. PMI for the more export oriented manufacturing industry dropped to 50.0 in December while the figure for services increased marginally to 55.7. We expect the oil price to stay at a level that provides good export- and government revenue. This creates room for fiscal policy and strengthens exports and other parts of the economy such as capital spending and consumption. Our forecast is that oil prices will average USD 107.5 per barrel in 2013 and USD 110.0 in 2014. We stick to our forecast from Nordic Outlook November and expect GDP to grow by 3.4 2013 and 4.0 2014. High oil dependence poses a risk both in the short- and long term. If oil price would drop it would put a significant pressure on the economy.
Key data Percentage change

MONDAY 15 JANUARY 2013 Daniel Bergvall Economic Research +46 8 763 85 94

2011 2012 2013 2014 GDP Unemployment* Inflation

*% of labour force, **% of GDP Source: Federal State Statistics Service, SEB

4.3 7.5 8.5

3.5 6.6 5.1 0.5

3.4 6.0 6.0 -0.5

4.0 6.1 4.5 -0.5

Government fiscal balance** 1.6

Economic Insights

SLOW EXPORT GROWTH, DOMESTIC DEMAND RESILIENT BUT HIGH INFLATION HURTS REAL INCOME In annual terms GDP-growth slowed down during 2012; from 4.9% in the first quarter to 2.9% in the third. Seasonally adjusted and compared to the previous quarter, growth was more even during the year with the third being the strongest. Forward looking indicators are in line with diverging hard data showing a weak external and industrial production performance at the same time as services are more resilient. The composite purchasing managers index (PMI) fell in the two last months 2012 from 53.7 in October to 52.2 in December; the outlook is a bit weaker but still above 50. PMI for services on the one hand stayed just above 55 for the third month in a row at the same time as PMI for manufacturing industry dropped for the second month in a row to 50.0. Monthly data on industrial production is on a sideways, slightly weakening, trend. Exports fell by 4% in nominal prices in October 2012 and were according to national accounts roughly unchanged during the first 3 quarters 2012 compared to the same period 2011. Also capital spending is increasing at a slower pace, but data available for 2012 still shows a healthy increase. In the third quarter 2012 gross capital formation according to the National Accounts increased by 9.3% y/y, down from a 22.9% increase the same quarter 2011. PMI for new orders dropped in December 2012 to the lowest level since October 2010 in combination with a weak international outlook point at a continued slowdown in investments. There are factors pointing at investments continuing to increase though. Bank lending is increasing but at a slower pace, especially in foreign currency. In Roubles the increase was still more than 25% on an annual basis in October 2012. Low investment and a low investment ratio for a number of years and official policy to promote increased investments will support the development going ahead. High capacity utilisation also supports investments ahead. Consumer confidence dropped during 2012 as inflation increased, eroding real wages and household purchasing power. Last months have seen an improvement though and retail sales have been growing at a steady 4-4.5% y/y the last months of 2012. Lower inflation in the second half of 2013 will boost real income and support an increase in consumption expenditure, but we expect lower wage increases and fiscal stimulus in the years ahead compared to previous years.

Economic Insights

OIL REVENUE CONTINUE TO BOOST GOVERNMENT REVENUE, BUT LESS ROOM FOR MANOEUVRE AHEAD Unemployment continues to fall and is below the pre-crises level. According to the official definition, unemployment stood at 5.4% in November 2012. We expect unemployment to stay at roughly that that level 2013. Inflation rose from its April low of 3.6% to 6.6% in September and has stayed at that level since. The increase was mainly due to a hike in administrative prices that took effect in June instead of January 2013. Inflation is putting pressure on real income and may well rise further in the near term due to excise duties on alcohol and tobacco and deteriorating base effects before starting to fall in the second half of 2013. High inflation is also putting pressure on the central bank, which is getting more focused on inflation as it is moving towards inflation targeting. We expect the central bank to keep interests on hold this year but the risk of a tighter stance cannot be excluded. A stabilising factor is good public finances, late 2012 the budget went from deficit to surplus and government debt is low. But the budget situation is fragile and the governments reliance on oil revenue makes it vulnerable. Oil prices at todays level will stabilise the budget around balance, but leaves little room for increased spending similar to what we have seen in the last decade. Also, the room for manoeuvre would things turn to the worse is limited. The new fiscal rule that has been adapted is positive news and will, if used properly, smooth out oil-revenue over a number of years, making fiscal policy less erratic and more stable. Fiscal policy will continue to be expansionary, although much less than previous years, and we expect a government deficit of around 0.5% 2013 and 2014. Government debt will stay around 10% of GDP and the current account will continue to deteriorate, reaching around 1% of GDP in 2014.