Rally Continues: Russian Economy Expands by 3% YoY in June
Bottom Line: According to the preliminary figures announced by the Russian Ministry of Economic Development, Russia's GDP grew by 3% YoY in June after expanding by a strong 4.5% YoY in May. We foresee Russian economy will expand by 2.5% in 2024 driven by a significant increase in military spending due to intensified Russian offensive operations in Ukraine coupled with rising salaries and payments boosting consumption despite aggressive monetary policy, sanctions and higher price pressures remain restrictive.
Figure 1: GDP Growth (%, Annual), January 2023 – June 2024
Source: Central Bank of Russia (CBR)
Russian economy continued its strong growth pattern in June, and grew by 3% YoY in June despite the increasing trend decelerated when compared to April and May. The main reasons behind the expansion remained fiscal stimulus, increased military spending coupled with strong household consumption despite the fact that economy is still strained by sanctions, export controls, high inflation, and tight labor market conditions. We expect strong growth figures will be partly suppressed in Q3/Q4 by CBR’s 200 bps key rate hike decision on July 26 to tame the stubborn price pressures. (Note: Q2 GDP growth rate is scheduled to be announced on August 9).
CBR announced on July 26 that it raised its growth forecast for 2024 to 3.5-4% while it lowered its GDP growth forecast for 2025 to 0.5-1.5% from previously 1-2%. The forecast for 2026 was reduced to 1-2% from the previously expected 1.5-2.5%. CBR’s MPC report highlighted on July 26 the growth was strong due to various reasons including consumer activity remaining high, shortage of labor resources increasing and investment demand supported by both budgetary incentives and high company profits. The Ministry of Economic Development predicts the Russian economy to grow by 2.8% in 2024, by 2.3% in 2025 and 2026. (Note: IMF forecasts economic growth to record 3.2% in 2024, and the Organization for Economic Co-operation and Development (OECD) foresees growth to stand at 2.6%).
In addition to increasing military spending and fiscal stimulus, it is worth noting that oil export volumes are reported to hold steady despite sanctions, which also contributes to growth taking into account that oil and gas revenues remain the most important single source of cash for the country. Ministry of Finance of Russia data showed on July 3 that proceeds from oil and gas sales for federal budget rose by around 41% YoY in H1 2024 and amounted to 5,698 trillion roubles (RUB) ($65.1 billion), due to rising oil prices and the weaker RUB, Reuters reported.
According to CBR’s bulletin called What Trends Say on July 16, Russian economy grew by 0.8% in Q2 QoQ and the economy is preparing to adjust to the trajectory of balanced growth though this will not have an immediate impact on the labor market. CBR’s experts emphasized that "Labor demand has reached its all-time high, and the possibilities for expanding labor supply are limited by negative demographic trends. Such a situation incites the rates of wage growth much higher than labor productivity," which creates additional proinflation and growth risks.
We foresee Russian economy will expand by 2.5% in 2024 driven in part by a significant increase in military spending due to intensified Russian offensive operations in Ukraine coupled with rising salaries and payments to the families of the fallen and injured boosting consumption, despite shortage of skilled labor, lack of high-tech investments, increasing borrowing costs due to tight monetary policy, and higher price pressures remain restrictive.