East Office Quarterly report for 3Q19

•GDP growth in 3Q19 estimated at 2 %. First estimate of GDP growth shows accelerated growth for 3Q19 compared to the first half of the year. Growth appears to be driven by temporary factors as stocks have accumulated fast.
• Industrial production growth maintained at 2.9 % (y/y). A stronger manufacturing (+2.9 %) sector compensated for the deceleration in the extractives sector to 2.9 % in 2Q19 (from 3.3 % in 2Q19). Oil production remains subdued due to the OPEC+ production cut agreement. Agricultural sector was one of the strong drivers of growth with 5.1 % (y/y) growth.
• Rouble stayed relatively stable despite attacks on oil production. The RUB remained roughly at the level of the previous quarter in 3Q19 as oil prices were only temporarily affected by the attacks on Saudi oil production and the sabotage of the Druzhba oil pipeline. Russian state bonds also kept their popularity amongst foreign investors despite new U.S. sanctions on new Russian state debt.
• Inflation drops below the CBR target amid weaker private consumption. Inflation accelerated sharply in the first months of 2019 to 5.3 % due to a VAT rate increase but decelerated to 4.7 % (y/y) already in June.
• CBR lowered its key rate to 6.5 % in October as inflation drops below target. CBR’s move aimed at stimulating the weaker than expected consumption demand.
• Producer sentiments diverging between sectors. Manufacturing PMI dropped to its lowest value in a decade possibly reflecting a weak outlook globally while services PMI improved markedly led by a stronger real income.
• Consumer sentiment improved. Consumer sentiment has developed positively in 3Q19 but the approval of the president has remained at a low level.
• Current account surplus contracts due to a weaker trade balance. Export value decreased by -8 % (y/y) in 3Q19 due a lower oil price compared to a year ago and the OPEC+ production cut agreement, while imports continued to grow supported by a stable currency.
• Disposable incomes growing with their fastest rate since 2014. Real disposable incomes grew by 3 % led by continued real wage growth, decelerated inflation and a very low base level from previous years. Real disposable incomes remain at -9% below the 2013 level. Real incomes increased by 3.3 % and real wages by 2.4 % (y/y) in 3Q19.
• Unemployment remains record low but workforce declining faster. In Sept 2019, the unemployment rate remained at a record low level of 4.5 % partly due to the accelerated contraction of the workforce. MinEcon estimates that between Jan-Aug 2019, Russia has suffered a loss of 1.1 million people from its workforce.

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