Summary
GDP growth of 4.1% y-o-y in Q1 came below expectations on weak performance of fixed investment, domestic demand and fast growing imports. However, upward revisions in Q1 GDP growth are likely, in our opinion, and we already observe signs of economic growth accelerating in Q2 on the back of higher oil prices.
Facts
Rosstat reported GDP growth of 4.1% y-o-y in Q1 2011 on Monday, 16 May. The reported growth rate is a touch lower than the market consensus of 4.2% and is below the Ministry of Economic Development and HSBC estimate of 4.5% GDP growth in Q1. GDP growth has also moderated compared to 4.5% y-o-y growth in Q4 2010. At this point, Rosstat does not provide details of GDP breakdown for Q1.
Implications
The GDP reading is clearly weaker but it can hardly be a big surprise. Monthly data on fixed investment, incomes, wages, consumption and imports reported earlier gave reasons to expect lower economic dynamics in Q1. However, we see two positive points in the report. The first point is back looking. Rosstat’s first GDP growth estimate was as low as 2.9% for Q1 2010. Over time, Rosstat has revised it up twice to 3.5%. We expect a similar occurrence this time as well observing inconsistencies in reported data on domestic demand that suggest that there is likely underestimation of economic activity. The second point is forward-looking. HSBC April PMI reports showed a rebound in the service sector as a reflection of stronger consumption demand. Taking into account the rise in crude oil prices since end-2010, there are reasons to expect this trend to continue. It should raise GDP growth to 5.5% in Q2 and to 7.0% in Q3, when better crops than last year are likely to boost output in agriculture (chart 1). Arguing for the likely improvement in Russia’s economic performance in the short term, we attribute it to higher oil prices and still consider it excessive compared to medium-term equilibrium growth of 3-4%. Starting from Q4 2011-Q1 2012, we expect economic growth in Russia to start losing momentum on a sustainable basis.
Bottomline
We believe there is no cause for concern. Our 2011 GDP growth forecast of 5.5% remains intact.