Russia’s basic sector output, which represents a large share of GDP, grew by nearly 2% in June, which should mean strong economic activity in the second quarter after a disappointing first quarter. Moreover, growth will be further bolstered as state spending on the 12 national projects is expected to pick up steam from here, say economists.
The basic sector activity expanded by 1.9% y/y in June after a 0.3% y/y contraction a month ago. This brought the 2Q19 figure up to 1.5% y/y growth, up from 0.9% y/y in 1Q19, Sberbank CIB said in a note.
“Taking into account the positive dynamics of other indicators, such as corporate lending activity and budget expenditures, we expect GDP growth to have accelerated to 0.7-0.9% y/y in 2Q19, up from the 0.5% y/y registered in 1Q19. GDP growth should further improve in 2H19, as it will be supported by higher budget expenditures on the so-called "national projects”,” Alexander Isakov, chief economist at VTB Capital said in a note.
Economic activity improved in June. Output of basic sectors – including agriculture, industrial production, construction, transport, retail and wholesale – rose by 1.9% y/y in June, compared with a 0.3% y/y decline the previous month.
This was mostly driven by a better y/y showing in industrial production in June (up by 3.3% versus 0.9% growth in May) and improvement of wholesale trade (albeit still down by 2.1% y/y, but better than the 6% y/y decline in May). Other sectors showed similar or slightly better dynamics in June versus May in y/y terms, reports Sberbank.
GDP growth will be slightly better in 2Q19, says Isakov. Basic sector output increased by 1.5% y/y in 2Q19, up from the 0.9% y/y growth in 1Q19.
“Although basic sectors do not capture all economic activity, the indicator can still be treated as a good proxy for GDP. Meanwhile, other indicators of economic activity, including corporate lending and budget expenditures, also showed some improvement in 2Q19. As a result, we expect GDP growth to have accelerated to 0.7-0.9% y/y in 2Q19, up from the 0.5% y/y registered in 1Q19,” says Isakov.
Sberbank expects economic activity to improve in 2H19, as it should be supported by higher government expenditures on national projects, which are off to a very slow start.
“According to the Accounting Chamber, government expenditures on national projects have continued to lag the initial plan. The government spent only 32% of the total annual budget plan (RUB0.6 trillion) on national projects in 1H19, while total budget expenditures were RUB8 trillion (43% of the annual plan). This was still better than the RUB0.2 trillion (13% of the annual plan) spent during 1Q19, meaning that the pace of expenditures increased in 2Q19,” Isakov said.
According to the Accounting Chamber, the most significant delay in expenditures was registered in the "digital economy" (8.3% of the annual plan),” safe and high-quality roads" (12.2%),"environment" (11.6%) and "improving labour productivity and supporting employment" (17.7%).
“We think that the government will likely increase spending on the national projects in 2H19 to catch up with the budget plan. This should support investment activity and GDP growth as a whole,” Isakov added.