An upbeat data release by Russian statistics agency RosStat suggests the Russian economy is doing better than expected. Capital Economics has revised its first-quarter GDP contraction estimate from -15% to -10%.

Russia’s economy in May 2022 showed stabilization on the production side after a sharp drop seen in March and April amid the barrage of Western sanctions, but the demand contraction is worsening, according to the latest sectoral basic data. of RosStat.

As the chart shows, Russia’s GDP fell 3% year on year in April 2022, turning into the red after GDP growth of 1.3% in March 2022, but the the outlook for the 2022 recession has actually improved.

Overall, core sectors posted a 3.2% year-on-year decline in May compared to a 2.6% year-on-year decline seen in April; the largest decline is partly due to base effects and the large number of public holidays in May. The decline in industrial production remained stable at -1.7% year-on-year in May despite base effects, with seasonally adjusted industrial production showing stable growth compared to a decline of 1.9% in April.

“The latest Russian data for May suggests that activity, after falling sharply following the imposition of Western sanctions in March, has started to stabilize. Some sectors of manufacturing industry have benefited from a reorientation towards domestic production Overall, Russia’s GDP decline this quarter appears to be in the 10% q/q range, not the 15% q/q we previously expected,” said emerging markets economist Liam Peach. at Capital Economics in an earnings note.

As reported by bne IntelliNewsthe the manufacturing PMI also returned to positive territory in May, showing an expansion of 50.8, against 48.2 in April despite the shocks of the war. Any result above the benchmark with no change of 50 is an expansion of activity.

Kommersant The daily cited the Gaidar Institute as attributing the stabilization of production in May to the replenishment of finished products and inventory. Business sentiment estimates previously released by the Central Bank of Russia (CBR) and SberIndex also showed only a slight deterioration in producer sentiment in May.

Peach of Capital Economics says some manufacturing sectors have even benefited from a shift to domestic production. The contraction in extraction output eased from 1.6%y/y to 0.8%y/y in May, but Capital Economics seasonal adjustment calculations show that oil and gas production even increased slightly – it increased by 1.1% m/m in May after having fallen by 7.5% m/m in April.

In manufacturing, the sector most dependent on Western imports, some segments continued to contract rapidly, with automotive production down 64% year on year in May and electrical equipment production down 13% over a year. Heavily dependent on imported parts, the Russian automotive industry has almost completely come to a standstill.

According to reports, only one of the six main Russian car factories under foreign control is still in operation. The sector’s recovery will be made even more difficult after the United States this week imposed sanctions on Russian truckmaker Kamaz, which was to provide the technological basis for a retooling of the giant car factory AvtoVaz to produce a Chinese version. update from the Soviet manufacturer. classic model, the Moskvitch sedan. Formerly owned by the Renault-Nissan joint venture, AvtoVaz was sold to the Russian government for one ruble in April.

Car sales have almost completely collapsed since the start of the war, chart shows this, as Russians are sparing their money after sharp swings in the exchange rate and capital controls imposed by the CBR have temporarily blocked hard currency savings, fueling uncertainty.

Still, other results, like the 29% year-on-year increase in drug production, were seen as good signs by economists as companies adapted to the drastically changed operating conditions.

“But there are already clear signs that import substitution is on the way and that domestic production has increased in some sectors – computer and electronics production is up 36% y/y and drugs 29%. % y/y,” says Capital Economics.

On the demand side, the latest data from RosStat showed a general contraction in private consumption, while inflation remains above 17%. The shrinking retail sales widened slightly, from 9.7%y/y in April to 10.1%y/y in May, with the only consumer segment showing slight growth being restaurants. Capital Economics argued that non-food sales “appear to be bottoming out,” with the segment contracting 17.2% year-on-year in May from a 16.7% year-on-year decline in April.

real income chart shows that April (latest available data) contracted by 7.2% year-on-year, the fastest contraction since 2015. While nominal wages posted an increase of more than 9%, this increased been completely eroded by inflation. Overall, in January-April, real income rose only 0.4% year-on-year.

Economists worry that the true state of unemployment is hiding behind state efforts to shield the economy from shocks. The Kremlin announced a 1.6 trillion ruble social support package and idle workers at auto factories and foreign retailers that were shut down by self-sanctions are all still being paid in full, despite having no work to do.

“While official unemployment in Russia is still at a record high of 4%, job postings on the popular career portal HeadHunter have plummeted, in some cases by almost 90%. The most affected professions are not surprising: insurance, automotive, banking,” Janis Kluge, an economist at the German Institute for International and Security Affairs, said in a tweet. “While the bottom ten are mostly highly skilled white-collar workers, the top ten are the opposite: plumbing, construction, security, students. Why this particular model?

“Most likely the reason is that international investors are leaving (white collar workers) and guest workers are also leaving (blue collar workers, also students). Moreover, construction activity in Russia is holding up better than the rest of the economy so far,” Kluge added.

Still, employment remained resilientthe number of unemployed in Russia fell by 1 percentage point to 3.9% of the labor force in May, marking an all-time low.

All in all, while Capital Economics analysts do not expect a strong recovery from May, given that the retail and industrial sectors account for more than 40% of the Russian economy, the The forecast of a 15% q/q decline in Russian GDP in 2Q22 is now considered too pessimistic, with the actual decline not exceeding 10% q/q.