Russia Economic Activity - June Shows Signs of Relief

The June basic sector data showed signs of recovery, with most sectors improving in y-o-y terms (except agriculture and transport). Leading indicators also further improved in early July, which means that the economy likely bottomed in 2Q20 and started to recover early in 3Q20. However, after the initial rebound driven by the lifting of quarantine measures and deferred demand, further growth could be limited by high unemployment (6.2% in June) and a drop in real disposable income (down 8% y-o-y in 2Q20).> June data shows signs of improvement. All sectors except agriculture and transportation showed better dynamics in June. The most significant improvement was registered in retail trade, which was down just 7.7% y-o-y after a 19.2% decline in May, while construction activity was down just 0.1% y-o-y following a 3.1% drop. Industrial production showed only slight improvement (down 9.4% y-o-y versus 9.6% in May), as it continued to be hampered by reduced oil production. At the same time, growth slightly eased in the agriculture sector, slipping from 3.2% y-o-y in May to 3.0% in June, while in transportation the decline deepened from 9.3% to 9.5%. > Industrial production down 9.4% y-o-y in June, 8.5% y-o-y in 2Q20, after 1.5% y-o-y growth in 1Q20. One of the reasons for the still-sluggish performance in June was the continuing decline in mining and quarrying output, which fell 14.2% y-o-y following the 13.5% contraction in May, largely because of a 15.4% y-o-y or 4.8% m-o-m drop in oil production due to the OPEC+ deal. The manufacturing segment, however, showed some signs of improvement, its decline easing to 6.4% y-o-y from 7.2% in May. Many subsegments, particularly those driven by consumer demand, even posted positive dynamics in June. > Economic activity bottomed in 2Q20, has started to recover in 3Q20. The available statistics for 2Q20 show that retail trade contracted by 16.6% y-o-y, industrial output by 8.5%, transport by 8.2% and construction by 1.7% in the quarter, while agricultural output grew 3.1%. Still, the better dynamics of most sectors in June, as well as the further pickup of leading indicators in July, suggest that the economic recovery is underway.> Retail trade continued to recover in June. The retail trade sector shrank 7.7% y-o-y in June after a 19.2% contraction in May and 23.2% decline in April. This meant a 16.6% y-o-y contraction in 2Q20 following the 4.4% growth in 1Q20 (output was down 6.4% y-o-y in 1H20). Output from the food retail segment was down just 3.7% y-o-y in June, compared with an 8.6% decline in May, while non-food retail sales were down 11.3% after a 29.2% contraction. Paid services to the population have been slower to recover, having posted a 34.5% y-o-y drop in June, only a slight improvement from the 39.5% decrease in May. > Real disposable income down 8.0% y-o-y in 2Q20. According to the State Statistics Service, real disposable income was down 8.0% y-o-y in 2Q20 and 3.7% y-o-y in 1H20 (it was up 1.2% y-o-y in 1Q20). Taking into account that real wages were up 3.4% y-o-y in 5m20 (the data for June is not yet available), the decline in income was mostly attributable to a drop in other sources of income (including from businesses and assets), as well as a rise in unemployment. The decline in real disposable income in 2Q20 was less steep than that in consumption, which means that households added to their savings, likely due to concerns over employment and rising uncertainty in general. > Unemployment edges up to 6.2% in June. The unemployment rate edged up to 6.2% in June from 6.1% in May, with the total number of the unemployed increasing by 93k to 4.6 mln (up 1.1 mln YTD). In seasonally adjusted terms, unemployment reached 6.3%, the highest level since November 2011. > The SberIndex consumer spending gauge showed further improvement in early July. According to SberIndex, Sberbank's leading consumer spending indicator, household consumption was up 0.2% y-o-y over the first 12 days of July, an improvement from the 8.5% y-o-y contraction in June and 16.8% drop in May. The most significant improvement was registered in spending on non-food items (up 7.3% y-o-y, compared with a 1.0% increase in June) and services (down just 18.6% y-o-y after a 34.1% contraction). As the quarantine measures have been eased across the country and most businesses (including retail outlets and service providers) are back to work, economic activity has started to recover. However, it is likely that the dynamics will remain weak. After the initial bounce-back, which was driven in part by deferred demand, we could see the momentum start to slow again, as household incomes remain under pressure.