BOFIT Weekly Review 2016/04
Russian economy continued to contract in December
Rosstat reports that industrial output and retail sales both continued to slide in December. In annual terms, retail sales were down 15 %, a fall amplified by its referencing to the December 2014 shopping spree caused by the sharp ruble depreciation. Fixed capital investment was down nearly 9 % y-o-y in December, while industrial output fell almost 5 %.
Russia’s economy last year contracted for the first time since the 2009 economic crisis (GDP down 3.7 %), but growth was already slowing earlier due to structural problems. The current situation is somewhat different from the 2009 crisis, however. Household incomes and consumption have contracted much more violently, due e.g. to more modest public sector support as an increasing share of budget spending has been directed to the defence sector. Real wages declined last year nearly 10 %, while unemployment rose to just under 6 %. Retail sales fell 10 % last year.
Fixed investment fell just over 8 % last year. While the contraction in investment was slower than during the 2009 crisis, it has gone on for several years due to Russia’s poor business environment, lack of access to financing and increased uncertainty. Poor investment development also restricts future growth potential of Russian economy.
Trends in Russian fixed investment and retail sales
Sources: Rosstat and BOFIT.
Given weak demand, industrial output last year contracted 3 % and construction activity fell 7 %. The mineral extractive sector (includes oil & gas) remained unchanged. Growth was only posted in the food industry (up 2 %) and the chemicals industry (up 6 %). The weak ruble caused imports to shrink substantially and gave a slight boost to some domestic producers. The government has also sought to support domestic producers through measures limiting imports. The effectiveness of these measures has been questionable and especially in longer term import substitution policies rather restrain economic growth by e.g. restricting competition.