Growth in the second quarter remains slow with the economy expanding by 0.9% year-on-year – well below potential.

What is holding growth back is the very slow start to the government’s RUB27 trillion spending on the 12 national projects. The government has only spend 36% of the money allocated to the first half as it is still struggling to identify specific projects and get them organised.

Amongst the good news is that the Ministry of Economy has cut its inflation target twice in September to 3.6% for this year and 3% next year. This is way below the Central Bank of Russia (CBR) forecast for 4% but clearly inflation is falling faster than anyone hoped. The CBR was able to cut rates again in September to 7% and maybe able to cut again one more time this year, but if not it will continue cutting in the New Year.

Also reserves continue to rise and the size of the National Welfare Fund (NWF) doubled in September after the Ministry of Finance transfer excess revenues from oil it was holding in temporary accounts to the fund, which now holds $127bn. This takes the fund to 7% of GDP, after which any more money headed to sterilisation in the fund can now be spent by the government. This gives the government new resources to plough into the 12 national projects.

The brightest spot in the statistics was a new, post-Soviet, record low in unemployment, which fell to 4.3% in August (versus 4.4% in June-July) driven by seasonality and Russia’s shrinking lab or force.

Focusing back on growth, the most growth came from the financial industry, mining and quarrying, and transportation (0.8 pp combined). Most of the acceleration in GDP growth from 0.5% y/y in 1Q19 was the result of an improvement in real estate and wholesale and retail trade, which is being driven by a fast 25% year-on-year growth in consumer borrowing, not rising incomes, which remain stagnant.

While the wholesale and retail trade sector posted a 0.6% y/y decline in 2Q19 (subtracting 0.1 pp from GDP growth), this was significantly better than the 3.0% y/y contraction in 1Q19. Wholesale trade was primarily what dragged down this sector.

Russian economic activity did not provide any positive surprises in August, according to Rosstat and nearly all sectors performance had not changed from last year.

The lacklustre economic growth in the first half of this year is expected to speed up in the second half due to increased government spending on National Projects. However, other analysts previously warned that turnaround in the second half of the year may not to materialize.

Vladimir Tikhomirov of BCS notes that as the government continues to debate ways to spend its reserves, the latter continues to grow and the economy continues to struggle. BCS therefore reiterate the 2019 GDP growth forecast of 1.1% y/y.

Most recently, following the slow start of the year, the Ministry of Economic Development has downgraded the economic outlook, expecting GDP growth of 1.3% in 2019.