Russian households not ready to spend yet

While the slowdown in the Russian retail trade from 1.1% year-on-year (upgraded from the earlier estimate of 1.0% YoY) in July to 0.8% YoY was slightly below our and the market expectations, we do not tend to over-dramatize it as it seems to reflect a higher preference for savings.

• The slowdown in retail trade growth, observed mainly in the food segment, took place amid declining support from retail lending, which continued to show gradual deceleration from the 23% YoY peak in April to 21% YoY in August;
• Income trend showed no noticeable deterioration, with real salary growth staying at 3.0% YoY, in line with expectations;
• Retail deposit growth slightly accelerated to 7.6% YoY in August in nominal terms, but cleaned from the FX revaluation effect this growth is 8.2% YoY, which is a 16-month high;
• The monthly polls measuring household sentiment indicate that in August households showed a higher preference for sizable services spending (home renovations, summer vacation) and making savings.

Overall, the household sector data points at a slightly higher quality of consumption amid the managed deceleration of consumer lending. The accumulation of savings, if continued, would set the stage for a recovery in consumption closer to this year-end and next year as soon as the much-expected activization of the budget spending translates in higher confidence in the corporate sector and consequently among consumers.

The corporate activity indicators for August suggest that the acceleration in the budget spending growth from 3% YoY in 7M19 to 19% YoY in August (which we already mentioned earlier) has so far supported only industrial production growth, but didn't translate into higher construction volumes, which so far remain close to zero (0.3% YoY in August). Given the expected further acceleration of the budget spending (mainly related to the infrastructure-focused National Projects) until the year-end, we remain optimistic about the corporate activity going forward. At the same time, we see two key risks:

• In order to fulfill the budget spending plan, the Finance Ministry has to accelerate spending to around 30% YoY in September-December, which appears ambitious, and it remains unclear whether the real sector will find it possible to absorb in time. Some of the actual spending might be delayed till 2020;
• The activity outside the infrastructure- and budget-driven sectors remains unclear, as the banking sector data suggest deceleration in the corporate lending growth to a 20-month low of 4.3% YoY in August (or to a 12-month low of 4.9% YoY adjusted for the FX revaluation effect). We take this slow lending growth as a sign of so far weak investment demand in the private sector.