Key View: We hold a negative outlook for consumer spending in Russia over the short term. The escalation of the Russia-Ukraine Crisis, which has led to sanctions, will have a negative impact on Russia's consumer and retail sector in 2022 and 2023. Our view of significant contractions in real household spending in Russia in 2022 and 2023 (-20.4% and -0.8% respectively) is driven by the negative implications that sanctions will have on the country's economy. The risks to our view are skewed to the downside, as higher inflation and unemployment weighs on the outlook for the Russian consumer.
Outlook For 2022
At Fitch Solutions, we believe that the escalation of the Russia-Ukraine Crisis will have a significant negative impact on Russia's consumer and retail sector over 2022 and 2023, due to the sanction released by the US, UK, EU and other allies in response to Russia’s February 2022 invasion of Ukraine. We have revised down our consumer spending forecasts on the back of this invasion. We now forecast real household spending in Russia to contract by -20.4% in 2022 and by a further -0.8% in 2023, a significant downward revision from our previous growth forecasts of a growth of 1.5% y-o-y in 2022 and 2.5% y-o-y in 2023 (see graph below). This means that by the end of our five-year forecast period (2026), total household spending (in real terms) will now reach RUB26.5trn in 2026 compared to our previous forecast of RUB33.8trn, a total difference of RUB7.3trn.
War In Ukraine Will Weigh Heavily On Consumer Spending In Russia
Russia - Real Household Spending, % y-o-y (2017-2026)
Our view of significant contractions in real household spending in Russia in 2022 and 2023 is driven by the negative implications that sanctions will have on the country's economy. As of May 2022, Russia is the most sanctioned country on earth. These will lead to a severe deterioration in the economic outlook of the country, weighing significantly on Russian households and consumers. Households will increasingly face a deteriorating macroeconomic environment, where high unemployment and inflation will weigh on consumer sentiment. Similarly, shortages in consumer goods, especially those sourced externally, will weigh on retail sales growth going forward.
High Frequency Data Yet To Reflect Impact Of Invasion
Russia - Consumer Confidence & Retail Sales (2018-2022)
Insight Into Consumer Spending
Our view of a significant contraction in real household spending in Russia over 2022 is in line with our Country Risk's view on the economic outlook for the country over the short term. The combined impact of a broad range of US, UK, EU and their allies’ sanctions, the international private sector self-sanctioning and acute investor risk aversion (both foreign and domestic) will push the Russian economy into recession in 2022. The Russian economy is forecast to contract by -12.5% in 2022. Since February 22, Russia has quickly become the most heavily sanctioned country in the world as the US and EU lead 20 other countries in imposing punitive measures against it. To date, over 250 companies have self-sanctioned, including retail majors, Apple, Nike and IKEA. In our view, the growing number of private sector divestments will contribute to higher unemployment. Presently, unemployment in Russia stands at 7.0% of the labour force. This will weigh on the disposable incomes of households over the short and medium term.
|Real GDP (% chg y-o-y)||-12.5||2.5|
|Unemployment (% of total labour force)||7.0||5.0|
|Consumer price inflation (% y-o-y, ave)||20.0||14.0|
The Ukraine-Russia conflict is having a significant impact on the price of goods and services in Russia. The severe depreciation of the ruble will be one of many headwinds to private consumption in 2022, which our Country Risk team forecasts to decline by 10.0% y-o-y. Ruble weakness will fan inflationary pressures in Russia with the potential for hyperinflation to take hold over the course of the year. Inflation stood at 16.7% in March 2022 (latest available data), with core inflation even higher at 18.7%. Households’ 12-month inflation expectations will rise sharply in the months ahead and this will fuel a short-term surge in private consumption. This situation will be exacerbated as more foreign companies suspend their operations in Russia leading to shortages of some consumer goods.
As inflation accelerates in Russia, we believe that real wage growth will fail to keep up and most likely will begin to decline as activity stalls. Far higher prices and tight monetary conditions will also discourage spending and weigh on confidence, especially as we expect the Central Bank of Russia (CBR) to continue hiking its key policy rate through the year from 20.00% presently. Our Country Risk team forecasts interest rates rising to 28.00% by end-2022, but note that the CBR could hike even higher should hyperinflation set in.
Inflation Will Be Elevated Over The Year
Russia - Inflation Rates, % y-o-y (2018-2023)
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