April IP growth was reported at 4.5%, further extending the deceleration of the recent months (from 5.3% in March and 5.8% in April). To a large extent, this is an expected correction of export-driven growth, which has characterised the initial stage of the ongoing recovery. Particularly discouraging is the trend in the manufacturing industries (Figure 1). As the backbone of the ongoing recovery catches a headwind, a lack of vigor in other sectors of the Russian economy comes to the forefront. Consumer sector growth remains modest (retail sales were up 4.7% y/y in Q1), while alarmingly weak investment performance (-1.5% y/y in Q1) raises concerns about medium-term growth prospects.
Inflation in the industrial sector remains high (20.2% y/y in April), particularly in extracting industries (36.8%, Figure 2). This erodes the competiveness of Russian industries (and has recently been amplified by appreciating rouble) and is likely to trickle down to consumer prices, in our opinion.