Macroeconomic Environment in 2019
According to January 2020 estimates from the International Monetary Fund (IMF), global economic growth in 2019 (PPPPurchasing power parity. GDP in constant 2011 prices) slowed down to 2.9% year-on-year (3.6% year-on-year in 2018). GDP growth rates in developed economies dropped from 2.2% year-on-year in 2018 to 1.7% year-on-year in 2019 while slipping in emerging markets from 4.5% year-on-year to 3.7% year-on-year.
The global GDP growth was largely halted by a cyclical economic slowdown in developed economies (above all in the USA and the European Union) and escalation of trade conflicts.
According to OECD data, GDP growth in the USA slowed down to 2.3% year-on-year in 2019 on the back of lower investment activity. As the economy was slowing down, the U.S. Federal Reserve started loosening its monetary policy by cutting its key interest rate by 25 bps three times in 2019 to 1.5–1.75% p. a. as at the end of December 2019.
According to an initial assessment from OECD as at the end of January 2020, GDP growth rate in the Eurozone went down from 1.9% year-on-year in 2018 to 1.2% year-on-year in 2019, driven by weaker consumer spending and external demand for European goods amid rising protectionism in global trade.
As a result of slower economic growth and inflation dropping from 1.8% to 1.2%, the European Central Bank (ECB) lowered its deposit rate in September 2019 by 10 bps to – 0.5% p. a., announced that it would resume purchasing assets for EUR 20 bln per month starting from November and extended the maturity of targeted longer-term refinancing operations (TLTRO) from two to three years.
Export-oriented economies were adversely affected by changes in trade agreements and the newly imposed trade restrictions. In particular, GDP growth in Germany slowed down from 1.5% in 2018 to 0.6% in 2019.
According to OECD data, GDP growth in the UK slightly accelerated to 1.4% (vs 1.3% in 2018). The growth was mainly driven by consumer spending and government consumption. The effect from capital investments remained very marginal.
GDP growth rate in Japan rose from 0.3% in 2018 to 0.7% in 2019 on the back of higher consumer spending and government expenditures as well as private investment in housing construction.
In 2019, emerging markets demonstrated the lowest GDP growth rates since the global meltdown in 2008–2009. Some of the emerging economies suffered from a slump in commodity prices and geopolitical tensions all over the world.
The Chinese economy continued to slow down as its growth rate dropped to 6.1% year-on-year in 2019 (the lowest value in the last 28 years), which was driven by shrinking net exports of goods and services amid the unfolding trade conflict with the USA and halted domestic demand as a result of tougher financial sector regulations.
GDP growth rate in India decelerated from 6.8% in 2018 to 4.8% in 2019. The sluggish economic growth was due to reduced investment activity.
GDP growth in Brazil slowed down from 1.3% in 2018 to 1.1% in 2019. Mexico was facing stagnation with a zero GDP growth (2.1% year-on-year in 2018). Overall, GDP growth rates in Latin America and the Caribbean fell from 1.1% year-on-year in 2018 to 0.1% in 2019, mainly due to downturns caused by lingering structural challenges in some countries.
The Middle East and Central Asia suffered a major setback (with GDP growth rates going down from 1.9% in 2018 to 0.8% in 2019, including Saudi Arabia descending from 2.4% to 0.2%). So did the European emerging markets (climbing down from 3.1% in 2018 to 1.8% in 2019).
In January 2020, the IMF cut its global growth outlook for 2020 from 3.3% (vs 3.4% projected in October 2019). The coronavirus pandemic caused the OECD to review its global GDP growth forecast for 2020 to 2.4% in the base-case scenario. In 2021, GDP growth is expected to recover to 3.3%.
According to IMF estimates, global trade saw a major slowdown from 3.7% year-on-year in 2018 to 1.0% year-on-year in 2019, which was caused by heightening political and commercial contradictions between the USA and China.
The growth rates of trade in goods and services in developed economies dropped from 3.2% year-on-year in 2018 to 1.3% year-on-year in 2019 while sinking in emerging markets from 4.6% year-on-year to 0.4% year-on-year. As projected by the IMF, global trade will accelerate to 2.9% year-on-year in 2020 and 3.7% year-on-year in 2021The forecast was completed before the coronavirus pandemic.. The growth will be mainly driven by a further rise in domestic demand, with capital investments prompting investment imports.
In 2019, the Russian economy slowed down. According to an initial assessment from the Federal State Statistics Service (Rosstat), the Russian GDP rose by 1.3% year-on-year in 2019 (vs 2.5% year-on-year in 2018).
The slowdown was solely attributable to shrinking exports, with the entire GDP growth in 2019 driven by a 2.6% increase in domestic demand for Russian-made goods for both consumer and investment purposes.
In addition, gross capital accumulation, including both fixed and working capital, was growing marginally and still struggling to reach its pre-crisis state, also resulting in a weaker economic growth.
Amid a stronger rouble and expanding domestic demand, imports of both investment and consumer goods and services increased by 2.2% in 2019 (vs 2.6% in 2018).
In physical terms, export volumes dropped by 2.1% (up 5% in 2018). The OPEC+ agreement on production cuts remained in effect, somewhat holding down Russia’s exports.
According to Rosstat data, the following sectors were the largest contributors to the GDP growth in 2019: financial and insurance services (0.4 p.p.), natural resources (0.3 p.p.), manufacturing industry and trade (0.2 p.p. each), and transportation and storage (0.1 p.p.).
Investment demand was sluggish, which resulted in a lower gross value added (GVA) in construction (contributing 0.02 p.p.) and a shrinking GVA in machinery manufacturing.
In 2019, the country’s GDP was negatively affected by a shrinking GVA in real estate transactions (down 0.1 p.p.), mostly due to fewer residential properties going on stream. On top of that, the GDP was impacted by lower activities in healthcare and social services (down 0.1 p.p.) as a result of contracting federal budget expenditures.
As a result, Russia’s economic growth was mainly driven by private domestic demand, which translated into more jobs and higher real wages. Large-scale government expenditures were key to maintaining macroeconomic stability.
According to the Federal Customs Service of Russia, exports of Russian goodsAccording to the customs statistics. in value terms in 2019 amounted to USD 422.8 bln. As compared to 2018, exports of goods declined by USD 26.8 bln, or 6.0% year-on-year.
The Russian exports contracted in 2019 mainly due to exports of fuel and energy resources dropping by USD 24.5 bln amid decreasing prices for crude oil and natural gas.
Exports of goods were also negatively affected by metals and metalware (down by USD 6.1 bln), lumber and pulp and paper (down by USD 1.1 bln), machines, equipment and vehicles (down by USD 0.7 bln), food and soft commodities (down by USD 0.2 bln).
2019 saw a steep increase in exports of gems and jewellery (up by USD 5.1 bln).
Exports of crude oil in value terms in 2019 shrank by 6.0% to USD 121.4 bln, exports of petroleum products dropped by 14.5% to USD 66.9 bln, exports of natural gas, including liquefied natural gas (LNG), slipped by 9.0% to USD 49.6 bln. In 2019, crude oil and petroleum products accounted for 56.3% of total exports, down 2.0 p.p. year-on-year.
As at 1 January 2020, Russia’s international reserves rose by USD 85.9 bln mainly through FX purchases in the domestic market under the fiscal rule.
In 2019, the unemployment rate and the number of those employed both continued on a descending trajectory. In December 2019, employment amounted to 72.4 mln people, down 0.2 mln year-on-year. In the medium term, shrinking manpower is likely to hinder the country’s economic growth.
In December 2019, the unemployment rate dropped to 3.5 mln people, down 0.2 mln year-on-year.
As a result, the unemployment rate was 4.6% of economically active population, down 0.2 p.p. year-on-year. Russia enjoys the lowest unemployment rate in its modern history.
In 2019, real household income grew 1.5% year-on-year (vs 1.1% year-on-year in 2018) while real disposable income added 0.8% year-on-year (vs 0.1% year-on-year in 2018). According to Rosstat, income growth continues to lag behind real wages, which rose by 2.9% year-on-year in 2019.
According to the Bank of Russia’s base-case scenario as at February 2020, Russia’s GDP will grow by 1.5–2.0% in 2020. The growth will be mainly driven by higher government investment spending as national projects are gaining traction.
The Russian economy is projected to accelerate up to 1.5–2.5% in 2021 and 2.0–3.0% in 2022 on the back of gradually accruing positive effects from planned budget initiatives and national projects, if successful. However, the growth in 2021–2022 will be halted by a potentially weaker external demand with Russian exports struggling to increase by 2.0–2.5% in 2021 and 2.5–3.0% in 2022.
Energy Prices, Foreign Exchange Rates and Inflation in Russia
In 2019, the annual average Brent price was USD 64.3 per barrel, down 9.5% year-on-yearIn 2019, the annual average Urals price was USD 63.4 per barrel, down 9.1% year-on-year (USD 69.8 per barrel in 2018)..
Throughout 2018, global oil prices were driven by mixed trends. In January through April 2019, oil prices were rising (with the monthly average Brent price increasing from USD 59.5 per barrel in January to USD 71.3 per barrel in April) on the back of production cuts by both OPEC countries under the OPEC+ agreement and. In May through August, oil prices were declining (with the monthly average Brent price slipping from USD 71.1 per barrel in May to USD 59.0 per barrel in August) as risks were rising for global demand amid the escalating trade conflict between the USA and China. In September, oil prices saw a spike (with the monthly average Brent price reaching USD 62.8 per barrel) as a result of production cuts by Saudi Arabia following a drone attack. However, Saudi Arabia quickly restored oil production and the Brent price dropped to USD 59.7 per barrel in October against the backdrop of concerns about a global economic slowdown.
In November, the monthly average Brent price bounced back to USD 63.0 per barrel as the trade row between the USA and China eased up. In December, prices rose to USD 67.0 per barrel following the OPEC+ agreement on further production cuts starting January 2020.
Amid continued geopolitical tensions and new sanctions against Russia, the Russian national currency was weakening in 2019. According to the Bank for International Settlements, the annual average nominal USD / RUB exchange rate declined by 3.0% to RUB 64.73 per USD in 2019.
As at the end of December 2019, the nominal USD/RUB exchange rate appreciated by 11.8% year-on-year to RUB 62.27 per USD as at 31 December 2019, driven by higher oil prices, the Fed cutting its interest rate, and buoyant demand for Russian financial assets (with the share of non-residents in the federal loan bonds market rising by 7.8 p.p. to 32.2% as at 1 January 2020, according to the Bank of Russia).
As at the end of December 2019, inflation stood at 3.0% year-on-year (vs 4.3% in 2018), which is below the 2019 target of 5.0–5.5% set in the Monetary Policy Guidelines for 2019–2021 published by the Bank of Russia. The main driver behind the declining inflation in 2019 was the nominal rouble appreciation, given a significant share of imported goods in household consumption (ca. 36%). 2019 saw a certain slowdown in private consumption, which was also driving down inflation in Russia.
By contrast, the annual average consumer price index rose to 4.5% year-on-year in 2019 (vs 2.9% year-on-year in 2018).
According to the Bank of Russia’s projections as at February 2020, inflation will stand at 3.5–4.0% in 2020 and remain at ca. 4% in 2021–2022 in line with the Bank of Russia’s monetary policy.
In 2019, the annual average industrial producer price index in Russia was 102.9% (vs 111.9% in 2018). As at December 2019, producer prices went down by 4.3% year-on-year (up 11.7% year-on-year in 2018), mainly driven by lower prices in the extractive industry, which dropped by 9.2% year-on-year (up 20.7% year-on-year in 2018December 2018 vs December 2017.).
The freight rate index was 1.5% year-on-year as at December 2019 while the annual average index stood at 2.8%.
The Russian oil companies’ operating costs are very sensitive to changes in natural monopolies’ transportation tariffs.
Changes in Transneft’s tariffs
- As at 1 January 2019, Transneft’s crude oil transportation tariffs via trunk pipelines increased by 3.87%.
- As at 1 February 2019, transit tariffs for oil transportation via the Republic of Belarus were indexed by 7.6%.
Changes in Russian Railways’ tariffs
- As at 1 January 2019, railway transportation tariffs increased by 3.5%.