ING: New government expected to boost Russian industry growth

ING: New government expected to boost Russian industry growth

Russia’s industrial production growth softened in 2019 constrained by the OPEC+ agreement, weather and pessimism over local consumer demand. Nonetheless, a number of sectors outperformed. Analysts believe the growth may accelerate in 2020 fuelled by more active state support.

Russian industrial production finished 2019 with a 2,1% growth, reports ING Think adding that last year’s industrial output data points at a very limited negative reaction to adverse external and internal factors. In December, production accelerated to 2,1% year on year. Although it was a significant increase compared to November’s result of 0,3% year on year, it was still below the expectations of ING analysts. They note that December data benefited from a year-end splurge in budget spending, which further complicates forecasting and lowers the indicative power of year-end statistics.

In full-year terms, industrial production, which totals around 23% of the Russian GDP, fell from 2,9% year on year in 2018 to 2,4% in 2019. The result is slightly below the analysts’ expectations, but they do not consider it to be a sign of material deterioration of the industrial output, as the two sectors accounting for 80% of the slowdown were commodity extraction and electricity&heat distribution. The growth here was constrained by Russia’s OPEC+ commitments to limit oil production as well as warm weather conditions that lowered local energy demand.

Manufacturing, which accounts for half of Russia’s industrial output, showed a modest decrease from 2,6% in 2018 to 2,3% in 2019. The slowdown was mainly driven by consumer-focused sectors such as light vehicles, household appliances, office supplies and clothes. Other sectors including oil downstream, construction materials and metals, chemicals and machinery and equipment focused on the agricultural sector showed improved dynamics in 2019 compared to the previous year.

Russia’s new government headed by Mikhail Mishustin may address the issue of spending backlog. Photo:

In 2020, ING predicts an acceleration in the industrial output growth pointing out an expected increase in the budget support. The state spending on National Projects is supposed to increase from 2,7% of GDP in 2019 to 3,3% of GDP in 2020. Besides, the analysts assume that the new government may address the issue of spending backlog. Last year, the federal budget underspent around 150 billion rubles on National Projects in 2019, and this amount may be added to this year’s existing plan of 2 trillion rubles. The government is also expected to increase spending on social policy, which also has a significant spending backlog accumulated over the previous years. An additional support to household income may boost confidence among consumer-focused industries.

ING expects industrial output to accelerate to 2,7% in 2020 with the possibility to raise the expectations in case that the government confirms plans to accelerate spending. However, they warn that higher budget spending should be accompanied by systemic measures aimed at promoting favourable business climate, otherwise its effect on economic growth might be limited.

By Anna Litvina