Global Insight Perspective

Significance

The pace of Russian economic growth slowed in the first quarter of 2006 after a strong finish to 2005, in a pattern similar to that seen a year earlier.

Implications

Severe cold weather early in 2006 was probably a major factor in the slowdown, although the performance was still somewhat stronger than in the same period of 2005. The trade sector set the pace for the economy, spurred by a continuing surge in household consumption.

Outlook

Given effective capacity constraints, particularly in natural resource extraction, and a continuing competitive challenge for manufacturing, a further slowdown from the impressive rates of 2003-04 should be expected this year. Nevertheless, Global Insight projects 2006 growth at a still enviable 6.0%.

According to the preliminary estimate by the Russian Federal Statistical Service (RosStat), Russian GDP by sector of origin rose at 5.5% year-on-year (y/y) in the first quarter of 2006, down from 7.9% growth in the final quarter of 2005, but somewhat better than the 5.0% growth registered in the first quarter of last year. However, the only sectors of the economy that registered faster growth in the first quarter of 2006 than in the same quarter a year earlier were agriculture, industry, trade, financial activity, and state administration. State administration, including defence and social support activities, registered growth at 6.2% in the first quarter of 2006, compared with only 2.5% a year earlier. Financial activity expanded at a brisk 9.1% y/y, up from 6.4% growth in the same quarter of 2005.

Value added in agriculture and forestry rose at only 0.1% y/y in the first quarter, but this was nevertheless an improvement over the 1.1% decline seen in the same quarter a year earlier. Industrial gross value added grew at 3.9% y/y in the first quarter of 2006, nearly double the 2.0% registered in the same quarter of 2005. Industrial growth was led by the sub-sector of electricity, gas and water supply, which grew at 6.2% y/y in the first quarter of 2005, compared with only 1.5% growth a year earlier. The brisk increase in output of this sub-sector in the first quarter of this year was largely due to increase in demand during extraordinarily cold weather.

The manufacturing sub-sector performed considerably better in January-March 2006 relative to a year earlier, turning in growth at 4.6%, compared with only 1.9% growth in the earlier period. This was welcome news in light of concerns about the impact of the continued strengthening of the rouble in real effective terms on the competitiveness of Russian manufacturers, particularly vis-à-vis imports in the domestic market. Nevertheless, both the first-quarter 2006 and first-quarter 2005 results for manufacturing were a far cry from the 10.1% growth registered in the same quarter of 2004.

Growth has also moderated in the natural resource extraction branches of industry, to 1.7% y/y in the first quarter of 2006 from 10.1% in the first quarter of 2004 and 2.3% in the first quarter of 2006. The slowdown in natural resource extraction has reflected effective capacity constraints due to insufficient investment in past years. Typically, the new resource deposits necessary to replace older, depleted production assets in this sector have been associated with increasingly difficult geologic and climatic conditions, making their development and exploitation even more capital intensive.

The trade sector set the pace in the first quarter of 2006, with value added in that sector growing by 11.0% y/y, a moderate improvement over the 10.2% growth registered in the same period of 2005 and 8.8% growth in the first quarter of 2004. Value added in trade has continued to surge along with household consumption, reflecting robust increases in real wages and real disposable household incomes.

Among the remaining major sectors of the economy, both construction and trade and communications registered slower growth than in the same quarter a year earlier, probably due in considerable part to the extended period of very cold weather in Russia early this year. Value added in construction grew at only 1.6% y/y in January-March 2006, down from 4.6% a year earlier, while value added in transport and communication rose at 4.0%, compared with 6.7% in January-March 2005.

Outlook and Implications

The pace of Russian economic growth slowed in the first quarter of 2006 from the previous quarter, measured y/y, just as it had a year earlier. On the other hand, the rate of growth in January-March was modestly stronger than in the same period of 2005, despite the widespread impact of severe cold early this year. With respect to sector of origin, growth was led by trade and some categories of services, but there was also moderate improvement in industrial performance relative to a year earlier. Judging from gross activity indicators available on a monthly basis, the pace of economic expansion already began to pick up in March, particularly in industry and construction, and further improvement could be noted in April.

Global Insight projects that as a result of the moderate acceleration relative to the first quarter, GDP growth for the full year 2006 will come in at 6.0%. Russian GDP growth in 2005 was reported at 6.4%, down from the impressive 7%-plus rates registered in 2003-04.

Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416

raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com