Russia put in a mixed set of economic results in February. While unemployment fell to a record low and real disposable income jumped unexpectedly, overall retail sales fell, which was a surprise.

Russian activity figures for February were generally a bit weaker than expected, but even so it looks like the economy is on course to grow by about 1.5%-1.8% y/y in the first quarter, up from about 1.0% y/y in the final quarter of last year.

Industrial production slowed somewhat in February, retreating to a 1.5% y/y expansion, down from 2.9% y/y in January, which was below the consensus expectation of 2.1% y/y, according to Capital Economics.

“The slowdown was driven mainly by the manufacturing sector. That tallies with some of the surveys, notably the manufacturing PMI, which also weakened last month,” the consultants said in a note.

Manufacturing has been on and off, and companies are blowing in the winds of geopolitics, the ruble exchange rate and oil prices, all of which have affected retail turnover.

In other sectors, growth in the agricultural sector picked up to 2.6% y/y from 2.5% y/y, but output in the construction sector fell by 0.2% y/y, following an expansion of 0.2% y/y in January.

But the surprise was in retail, which weakened to a seven-month low of 1.8% y/y, down from 2.8% y/y in January and well below consensus expectations of 3.0% y/y.

“It’s not quite clear what’s behind the slowdown in the retail sector, but our sense is that it should be temporary. Other indicators such as motor vehicle sales point to strong consumer spending last month,” Capital Economics said in a note.

Retail sales had been recovering all last year and consumer credit has exploded. But this has not fed through into retail turnover and the foot traffic at the top malls in Moscow has also fallen, according to the Watcom Shopping index. That is despite a steady recovery in real incomes and now in real disposable incomes as well. Retail lending accelerated to 14.6% y/y in February while corporate lending sputtered.

“Retail lending trends remained strong in February, posting a 14.6% y/y increase, or 0.9% m/m growth. The continuing increase in borrowing is an additional driver for consumption, which we expect to strengthen in the coming months,” said Natalia Orlova, chief economist at Alfa Bank, said in a note.

“At the same time, the corporate lending picture is mixed: it looks like the strong demand for ruble-denominated loans, which appeared from the third quarter of 2017, has evaporated or at best paused, in February, which may indicate that the spike was just related to sanctions fears. However, it may also be due to weak industrial production growth.” 

But the effects are likely to be temporary as February’s batch of data also showed a further tightening of the labour market as unemployment fell to 5% from 5.2%, “which should feed through into stronger retail spending,” said Capital Economics.  

“The seasonally-adjusted unemployment rate edged down from 5.2% to 5.0% – the lowest rate since March 2014. And real disposable income growth jumped to 4.4% y/y last month, having been flat in year-on-year terms in January (the consensus was for a fall of 0.1% y/y),” the consultancy said in a note.

Predictably public sector wages registered the impact of the presidential elections with a big spike in wages, which probably accounts for the jump in disposable wages. 

“Budget figures point to 47% y/y expenditure growth in healthcare, education and national economy in 2M18: the indexation of public-sector salaries prior to the presidential elections looks to be the most likely explanation for the substantial boost in salaries,” said Orlova.

Rosstat reported a 28% y/y increase in nominal salaries in healthcare (vs. just 9% y/y growth in 2017) and an 18% y/y increase in nominal salaries in education (vs. 7% y/y salary growth in 2017) for January.

“The federal budget statistics confirms this generous spending: healthcare expenditures increased 63% y/y in 2M18, education spending rose 36% y/y for the same period, and spending in the national economy jumped 53% y/y. For 2M18, total federal budget expenditures grew 8% y/y (excluding one-off payments to pensioners in January 2017). The strong acceleration in expenditure growth contradicts MinFin guidance of 1% y/y spending growth for full-year 2018; we see public sector salary growth posing a challenge for budget stability this year,” concluded Orlova.