Russian GDP growth gains traction in 2H19

The Russian State Statistics Service (Rosstat) confirmed acceleration of GDP growth from 0.5% year-on-year in 1Q19 to 0.9% YoY in 2Q19, in line with expectations, and provided the structure of growth by sectors. We have the following observations:

• The modest improvement in the growth dynamic in 2Q19 was related to real estate and trade sectors, which after a negative 0.7 percentage point contribution in 1Q19 posted near-zero contribution in 2Q19. The improvement in the trade sector was likely related to the wholesale segment, as the earlier released retail trade data suggested mild deterioration in 2Q19;
• The contribution from the commodity extraction sector continued to decline from 0.7 pps in 4Q18 and 0.4 pps in 1Q19 to 0.3 pps in 2Q19 amid the deceleration in commodity extraction growth;
• Another constraint to growth was the reduction in net tax on products which may indicate a rise in subsidies, costing another 0.2 pps to the growth rate;
• The financial sector and the transport infrastructure remained a steady positive contributor to growth, while manufacturing, construction, agriculture and public sectors continued making zero contribution.

In our view, the growth structure confirms our earlier takeaways:

• The acceleration seen in 2Q19 reflects a reaction to the normalisation of the budget spending in the national economy, which after posting a 19% YoY decline in 1Q19, a 3-year low, showed a 16% YoY growth in 2Q19;
• The growth is not diversified, driven primarily by the oil sector (commodity extraction, transportation) and financials (banking and real estate operations), preventing an immediate return to the 1.9% YoY average quarterly GDP growth seen in the previous two years;
• The expected further acceleration in the budget spending growth on the economy - from 1% YoY in 1H19 to 29% YoY in 2H19 - in line with the activisation of National Projects, should provide a further boost to GDP growth through the construction and manufacturing sectors. At the same time, the weakness in consumption-related sectors and declining support from commodity extraction will likely limit the recovery.