Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, Craig Botham, Emerging Markets Economist at Schroders, comments on today's Russian GDP figures and what he expects for Russia's economy in 2015, and fellow BRIC nation Brazil.
The Russian economy put in a better than expected performance in the final quarter of 2014, with GDP growing 0.4% year on year against consensus expectations of 0% growth.
The Q4 growth was lower than the upwardly-revised previous quarter’s 0.9% growth, but a weaker number had been expected given the somewhat calamitous collapse of oil in the closing weeks of 2014. Growth for the year overall came in at 0.6%.
Looking at an expenditure breakdown of the GDP data, what growth there was came entirely from household consumption, which managed to expand 1% year on year, up from 0.2% the previous quarter. Government spending and investment both contracted, as did exports. This matches some anecdotal evidence that consumers have been frontloading consumption thanks to high inflation, which is clearly not a sustainable growth path.
On a sector basis, growth was recorded in just a handful of areas. Manufacturing barely managed to expand, growing 0.6% year on year, continuing the slowdown seen throughout 2015. PMI numbers in the first quarter of this year suggest a more negative set of figures will be the norm this year.
First quarter data in 2015 has been poor, to say the least. Inflation continues to climb (now running at almost 17%) whilst industrial production and PMIs show activity to be weak everywhere. Disposable income has also been contracting, making continued support from consumption a very unlikely prospect.
Needless to say, the fourth quarter’s surprise has not made us any more positive on the outlook for 2015. Barring a complete political reversal and removal of sanctions, or strong recovery in the price of oil, prepare for a significant contraction of activity this year.
Brazil Also Faces Negative Outlook
Brazil has posted a GDP growth reading of -0.2%, year on year, for the final quarter of 2014. This takes growth for the year as a whole to a meagre 0.1%. This was above consensus expectations, but in line with our forecast. The quarterly reading was stronger than expected, at 0.3% quarter on quarter versus the consensus of -0.1%. Unfortunately, it is all downhill from here.
Industrial production, unemployment and retail sales have all deteriorated, and the central bank’s own economic activity monitor points to a sharply weaker start to 2015. Meanwhile, inflation continues to climb and will face further pass-through pressure from the weakening currency, forcing tightening from a central bank whose policy rate already stands at 12.75%; one of the world’s highest.
With the headwinds of the ‘Lava Jato’ corruption scandal, fiscal consolidation and possible electricity rationing, 2015 is likely to be a lost year for growth in Brazil. There is also now news of a new corruption scandal at the tax appeals board, which will further stifle investment and sentiment. To make matters worse, President Dilma Rousseff would appear to be rapidly losing the popular mandate to take any action to fix things, with government popularity at its lowest since the last presidential impeachment. 2016 is, already, increasingly looking like a write-off as well.
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