An upbeat data release by the Russian statistics agency RosStat suggests that Russia’s economy is doing better than expected. Capital Economics has revised its estimates for the GDP contraction in the first quarter up from -15% to -10%.

The Russian economy in May 2022 showed stabilisation on the output side after a sharp decline seen in March and April amid the barrage of Western sanctions, but the contraction of demand is deepening, according to the latest base sector data from RosStat.

As the chart shows, Russia’s GDP declined by 3% year on year in April 2022, swinging into the red from 1.3% GDP growth in March 2022, but the outlook on the 2022 recession actually improved.

Overall, the base sectors showed a 3.2% y/y decline in May versus the 2.6% y/y decline seen in April; the steeper decline is partly due to base effects and the large number of holiday days in May. The industrial output decline remained stable at -1.7% y/y in May despite the base effects, with seasonally adjusted industrial output posting flat growth versus 1.9% decline in April.

“The latest Russian data for May suggest that activity, having declined sharply after Western sanctions were imposed in March, has started to stabilise. Some sectors of manufacturing have benefited from a shift towards domestic production. On balance, the fall in Russian GDP this quarter looks like it will be in the order of 10% quarter on quarter, not the 15% q/q we had previously expected,” Liam Peach, an emerging market economist with Capital Economics, said in a note on the results.

As reported by bne IntelliNews, the manufacturing PMI was also back in positive territory in May, posting an expansion of 50.8, up from 48.2 in April despite the war shocks. Any result above the no-change 50 benchmark is an expansion of activity.

Kommersant daily cited the Gaidar Institute as attributing the stabilisation of output in May to the restocking of finished products and inventories. The business climate estimates previously published by the Central Bank of Russia (CBR) and SberIndex also showed only a slight deterioration of producer sentiment in May.

Capital Economics’ Peach says that some sectors of manufacturing have even benefited from a shift towards domestic production. The contraction in extraction output eased from 1.6% y/y to 0.8% y/y in May, but the seasonal adjustment calculations by Capital Economics show that oil and gas production even picked up slightly – it rose by 1.1% month on month in May after falling by 7.5% m/m in April.

In manufacturing, the sector, which is most dependent on Western imports, some segments continued to contract rapidly, with car output down by 64% y/y in May and electrical equipment production down by 13% y/y. Heavily dependent on imported parts, Russia’s car-making industry has ground to an almost complete halt.

According to reports, only one of Russia’s six major foreign-controlled car plants is still operating. The recovery of the sector will be made even harder after the US slapped sanctions on Russian truck-maker Kamaz this week, which was going to provide the technological basis for a retooling of the giant AvtoVaz car plant to produce an updated Chinese version of the Soviet classic model, the Moskvitch saloon car. Formerly owned by the Renault-Nissan joint venture, AvtoVaz was sold to the Russian government for one ruble in April.

Car sales have almost entirely collapsed since the start of the war, as the chart shows, as Russians husband their money after the wild swings in the exchange rate and capital controls imposed by the CBR locked up hard currency savings temporarily, fuelling uncertainty.

Nevertheless, other results, like the 29% y/y increase in medicine production, were taken as good signs by economists as businesses adapted to the radically changed operating conditions.

“But there are already clear signs that import substitution is in motion and that domestic production has ramped up in certain sectors – production of computers and electronics rose by 36% y/y and medicines by 29% y/y,” Capital Economics argues.

On the demand side, the latest data from RosStat showed a broad-based contraction of private consumption, amid inflation remaining above 17%. The contraction in retail sales deepened slightly from 9.7% y/y in April to 10.1% y/y in May, with the only consumption segment showing slight growth being catering. Capital Economics argued that non-food sales “seem to be nearing a bottom”, with the contraction in the segment coming at 17.2% y/y in May versus a fall of 16.7% y/y in April.

The real income chart shows that April (last available data) contracted by 7.2% y/y, making the fastest contraction since 2015. While the nominal wages showed over 9% increase, this was fully eroded by inflation. Overall in January-April, real income inched up only by 0.4% y/y.

Economists fear that the true state of unemployment is hidden behind the state’s efforts to protect the economy from shocks. The Kremlin has announced a RUB1.6 trillion social support package and idle workers at car plants and foreign-owned retailers that have been shuttered by self-sanctions are all still on full pay, despite not having any work to do.

“While official unemployment in Russia is still at a record-low 4%, job postings at the popular career portal HeadHunter have collapsed, in some cases by almost 90%. The professions most affected are not surprising: Insurance, automotive, banking,” Janis Kluge, an economist with the German Institute for International and Security Affairs, said in a tweet. “While the bottom ten mostly consists of highly qualified white-collar workers, the top ten is the opposite: plumbing, construction, security, students. Why this peculiar pattern?”

“Most likely, the reason is that international investors are leaving (white collar) and guest workers are also leaving (blue collar, also students). Plus, activity in construction in Russia is holding up better than the rest of the economy so far,” Kluge added.

Still, employment remained resilient, with the number of people unemployed in Russia down 1 percentage point to 3.9% of the workforce in May, marking an all-time low.

All in all, while the Capital Economics analysts don’t expect a strong recovery from May, given that the retail and industrial sectors represent more than 40% of Russia’s economy, the forecast for a 15% q/q fall in Russian GDP in 2Q22 is now seen as too pessimistic, with the actual decline being no larger than 10% q/q.