Russia’s central bank upgrades GDP growth forecast for 2017 on better exports

The CBR has upgraded its GDP growth forecast for 2017, saying the economy will expand by 1.3-1.8%, rather than by 1.0-1.5% as thought in late March, according to a new report published over the weekend. The optimism was prompted by the expectation that export growth will be faster and import growth slower compared to the March report. The new forecast sees somewhat weaker domestic demand with forecasts for household consumption and gross capital formation reduced a bit. The same goes for 2018 where growth forecasts were not touched but net exports are expected to be the main growth driver, as domestic demand eases. The CBR did not change its oil price forecast for this year, but upgraded it a bit for next year, saying it will average USD42. The CA surplus will widen to USD37bn in 2017 from USD25bn in 2016 before falling to USD14bn in 2018, meaning that the CBR expects higher surplus, which implies a somewhat stronger ruble. Capital outflows will also be somewhat higher this year whereas next year’s forecast was revised downwards.

Similarly to the March report, the CBR describes an optimistic macro scenario where oil prices reach about USD60 in the medium term, which would lead to a stronger ruble and domestic demand with investment activity by firms being stronger than household consumption. Net exports would weaken, compared to the baseline scenario, as import growth strengthens. Public finances are expected to improve somewhat faster than the baseline scenario, because the stronger domestic demand will boost tax revenues.

The CBR continues to see risks from oil prices probably falling to USD25 in Q1’2018 with demand from abroad falling across the board. This entails worsening market conditions amid rising borrowing costs for firms and higher capital outflows, which would lead to a weaker ruble. Domestic demand would be much weaker than under the baseline scenario with household consumption contracting.

The CBR outlined main risks to the inflation forecast, saying they include inflation expectations, a stronger recovery of consumer demand supported by higher-than-expected credit activity, and intensifying structural weaknesses on the labor market amid shrinking working-age population. It sees potential for higher government spending if oil prices were to rise significantly, which could reinforce inflationary pressures and necessitate tighter-than-expected monetary policy.

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