Macroeconomic Situation in 2018

GDP Variation

According to January 2019 estimates from the International Monetary Fund (IMF), global economic growth in 2018 (PPPPurchasing power parity. GDP in constant 2011 prices) dropped to 3.7% (3.8% in 2017). GDP growth rates in developed countries decreased from 2.4% in 2017 to 2.3% in 2018, and in developing countries – from 4.7% to 4.6%.

Among the developed countries, the US economy posted significant growth in 2018 – up to 2.9% (2.2% year-on-year), primarily as a result of stimulating fiscal policy In 2018, the lower cut-off rate for individuals in the USA fell from 15% to 10%, and the upper rate – from 39.6% to 37%. From 2018 on, the maximum rate of 37.0% applies to income in excess of USD 500,000 ( USD 600,000 for joint fillers). , which had a positive impact on household consumption. In 2019, according to the IMF projections, this country is expected to face a progressive slowdown in economic growth rates of up to 2.5, as the effect of fiscal incentives is exhausted.

The GDP growth rate of the Eurozone in 2018 decreased from 2.4% in 2017 to 1.8, which is associated with a deceleration in the growth of private consumption and foreign demand for European goods driven by increased protectionism in global trade. The Eurozone economic slowdown was also entailed by the re-adjustment of automotive production to new environmental standards, which adversely affected commercial production.

The export-oriented economies were significantly affected by changes in trade agreements and the introduction of new export/import duties in 2018. In particular, GDP growth in GermanyAccording to Eurostat. in 2018 decreased from 2.2% in 2017 to 1.4%.

As a result of the stagnant private consumption and demand for exported goods and services in 2018, Japan’s GDP growth slowed down (from 1.9% in 2017 to 0.8% in 2018), as well as Canada’s (from 3.0% to 1.8%), France’s (from 2.2% to 1.5%), According to OECD. and Great Britain’s GDP (from 1.8% to 1.4%).

As reported by OECD, China's GDP growth in 2018 slowed down from 6.8% in 2017 to 6.6% (the lowest value since 1990) due to a slower growth rate of goods and services exports and investments in fixed assets. In light of this, the Chinese authorities are taking fiscal and monetary accommodation measures.

India enjoyed the significantly accelerated economic growth: in 2018 its GDP increased by 7.4% (against 6.9% in 2017).

In 2018, GDP of the Middle Eastern and Northern African countries rose by 2.4% (against 2.2% in 2017), including 2.3% increase in Saudi Arabia after 0.9% decrease in 2017.

The economic growth rates of the CIS countries (excluding Russia) increased by 0.3 p.p. to 3.9%. GDP growth in Latin America and the Caribbean slowed to 1.1% year-on-year (in 2017 — 1.3% yearon-year) and in European developing countries — to 3.8% year-on-year (in 2017 — 6.0% year-on-year).

The IMF lowered its January 2019 forecast for the global economic growth in 2019 to 3.5% (October 2018 forecast – 3.7%). The GDP growth rates of developed countries in 2019 will decrease to 2.0%, and the same in developing countries – to 4.5%. In 2020, global GDP growth rates will heighten to 3.6%.

GDP Growth in Developed Countries
Sources: IMF, OECD, Eurostat

GDP Growth in Developing Countries
Sources: IMF, OECD, Rosstat

Global Trade

2018 was marked with a slowdown in the international trade growth on the back of trade confrontations and the deterioration of external financing for emerging market countries. According to IMF estimates, the growth in international trade in goods and services decelerated from 5.3% in 2017 to 4.0 in 2018, whereas the growth rate of trade in goods and services in developed countries declined from 4.3% in 2017 to 3.2% in 2018, and in developing countries – from 7.1% to 5.4%.

As projected by IMF, the growth rate of global trade in 2019 and 2020 will be 4.0% year-on-year. The main drivers behind the slowdown in global trade, as set out in the IMF report, are a further escalation in protectionism and an increase in base interest rates by leading central banks (USA, Europe, and Japan).

Russian Economy

In 2018, the Russian economy enjoyed accelerated growth: its GDP, according to Rosstat (first estimate), increased by 2.3% (in 2017 – by 1.6%). Rallying domestic investment and consumer activities supported manufacturing industry, wholesale and retail trade, and construction, which made the most significant contribution to GDP growth in 2018. The cumulative contribution of these activities to GDP growth was about 0.7 p.p.

In 2018, the gross value added (GVA) across the intermediary services sectors (real estate, financial, and insurance services), transportation and storage, as well as information and communication services continued to grow. The cumulative contribution of these activities to GDP growth was about 0.5 p.p.

A significant positive contribution to GDP growth in 2018, as a year earlier, was made by the mining of minerals – about 0.4 p.p.

Exports of Russian goodsAccording to the customs statistics. in 2018, according to the Federal Customs Service of the Russian Federation (FCS of Russia), amounted to RUB 449.3 bln. Against 2017, exports of goods grew by RUB 91.5 bln, or 25.6%.

The major contributors to the increased exports of goods (in value terms) were fuel and energy products, which, according to the Federal Customs Service of Russia, accounted for 81.6% of the total growth, mainly due to the surge in world prices for oil and natural gas. Other minor contributors were metals and metal products (7.4%), and food and agricultural raw materials (4.6%).

Crude oil exports (in value terms) jumped up by 38.2% to USD 129.0 bln, petroleum products – by 34.1% to USD 78.1 bln, and gas (including LNG) – by 30.0% to USD 54.4 bln. The share of hydrocarbons and petroleum products in the total volume of exported goods in 2018 was 58.2%, up 4.1 p.p. year-on-year.

With the economy growing, the employment volume at the end of 2018 (compared to the same period of the previous year), according to Rosstat, increased by 0.2 million people, or by 0.2% year-on-year, to 72.6 million people. Unemployment to economically active population ratio at the end of 2018 was 4.8% (5.1% year-on-year).

Russian Exports, USD bln
Source: Federal Customs Service of Russia

In 2018, the decline in real disposable cash income was 0.2% year-on-year, despite the large increase in real earnings (+6.8% year-on-year). One of the factors exerting downward pressure on the real disposable money incomes of the population was a large-scale expansion of consumer and mortgage lending with a fairly high debt servicing cost.

As projected by the Bank of Russia (as of February 2019), Russia's GDP growth rates in 2019 will slightly decrease and stand at 1.2–1.7% year-on-year. In 2019, the flow of domestic demand will be held down by increased VAT, a slowdown in the rise of the economy’s revenues from the export of goods due to lower oil prices, and a slight slowdown in lending growth.

In 2020–2021, the growth of the Russian economy will accelerate to 1.8–2.3% and 2.0–3.0%, respectively. This growth will be promoted by the gradual buildup of positive effects from the planned fiscal policy and restructuring measures, given their successful implementation.

Unemployment rate in Russia (EOY), % of economically active population
Source: Rosstat

Changes in real disposable incomes of the population and earnings in Russia, % year-on-year

Energy Prices. Exchange Rate and Inflation in Russia

The upward trend in oil prices persisted from January to early October 2018 until the undersupply of the oil market changed to surplus. On 4 October in 2018, the Brent oil price maxed out at USD 86.16 per barrel, and then, in December, it began to decline to the level of USD 50 per barrel. The average annual price of Brent oil in 2018 was USD 71.1 per barrel, up 31.0% year-on-year (USD 54.3 per barrel). The average annual price of Urals oil in 2018 was USD 69.8 per barrel. (53.1 USD year-on-year).

In 2018, on the back of new US sanctions against Russia in April and August, which triggered off a capital outflow from the Russian Federation, as well as amid continued high geopolitical tensions and reduced demand for financial assets of developing countries, the Russian national currency was reported to be weakening. However, relatively high oil prices were holding back the depreciation of the nominal ruble exchange rate. In 2018, the average annual nominal RUB/ USD rate, according to the Bank for International Settlements, decreased by 7.1%, the average annual RUB/USD exchange rate was RUB 62.81 per one U.S. dollar.

At the end of December 2018, as a result of the fall in oil prices and the deteriorating economic situation in developing countries with a downturn in demand for risky assets driven by the tightening of the monetary policy of the US Federal Reserve (the base rate in 2018 was raised from 1.25–1.50% to 2.25–2.5% at the end of December 2018), the nominal RUB/USD rate, according to the Bank for International Settlements, decreased by 16.9% year-on-year, the RUB/USD exchange rate was RUB 69.62 per a U.S. dollar as at 31 December 2018.

Urals and Brent Average Annual Price, USD per barrel
Source: Platts

Variance of average annual nominal exchange rates of the largest developing and oil-producing countries to USD in 2018, % YOY
Variance of nominal exchange rates of the largest developing and oil-producing countries to USD as of the end of December 2018, % YOY
Source: Bank for International Settlements

In 2018, inflation was at 4.3%December-on-December (against 2.5% in 2017), which is above the inflation target for 2018 (4.0%) set in the Main Monetary Policy Guidelines of the Central Bank of the Russian Federation (Bank of Russia) for 2018–2020. In 2018, the annual average consumer price index was 2.9% (against 3.7% in 2017).

The main driver behind the accelerating inflation in 2018 was the weakening of the ruble, given the significant share of imported goods in household consumption (about 36%). An additional source of increased inflationary pressure in the Russian Federation in 2018, according to Bank of Russia estimates, was a rise in world energy prices, which affected the acceleration of producer price growth in oil production and refining, thereby leading to higher domestic consumer prices for motor fuel.

According to the Bank of Russia’s projections (as of February 2019), annual inflation in 2019 will rise to 5.0–5.5%. According to the Bank of Russia estimates, the main contributor to the changes in consumer prices in 2019 will be the increased VAT rate, + about 1 p.p. to annual inflation.

The Bank of Russia considers the persisting uncertainty of the external conditions of the Russian economy, associated with geopolitical factors, sanctions, and capital outflows from developing countries, as the main risks of accelerating inflation in 2019.

According to the Bank of Russia, annual inflation will return to 4% in H1 2020 once the effects of the weakening ruble and the increased VAT will be exhausted.

Industrial products producer prices in the domestic market in 2018 surged by 11.7% year-on-year (against 8.4% in 2017). The average annual index of producer prices in the domestic market in 2018 was 11.9% (against 7.6% in 2017). According to the forecast of the Ministry of Economic Development, the producer prices in the domestic market in 2019 will rise by 2.6% (December-on-December).

In 2018, oil companies’ transportation costs in Russia grew following an increase in tariffs. Since 1 January 2018, the indexation of Transneft’s tariff rates for oil transportation via trunk pipelines was 3.95%.

In January 2018, railway transportation tariffs were increased by 5.4%. In 2018, Russian Railways made a number of resolutions on the application of degression factors to the current tariffs for the transportation of goods by Rosneft in certain directions.

Inflation in Russia, % (December-on-December)
Average nominal exchange rate, RUB /USD
Sources: Bank of Russia, Bank for International Settlements

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