By Clemens Grafe, Chief Economist, Goldman Sachs Russia.
Russia’s economy continues to be out of synch with much of the rest of the world: GDP growth has held up at an above-trend pace despite a slowing global economy. That said, we estimate that the output gap has now closed and that the economy will have to slow down to avoid an inflation overshoot in 2013. In the short term, this suggests that the CBR will likely be comfortable with a continuation of the recent tighter credit conditions, stemming from capital outflows. The alternative would be rate hikes and, conditional on a loosening in credit conditions, we continue to forecast 50bp of rate hikes in 2H2012. However, given that fiscal policy plans point to a significant tightening in 2013, we think the CBR will receive some help in keeping inflation in check. The Ruble has underperformed significantly since May, and has underperformed oil prices despite a rising interest rate and growth differential. We attribute this anomaly to an asymmetric reaction of capital flows. This could reverse once bond markets become more accessible to foreign investors, as we expect. Given the better than expected growth outcome in Q1, we have raised our real GDP forecast for 2012 to 4.1% (previously 3.9%). At the same time, the tighter output gap leads us to lower our forecast for 2013 by a similar margin, to 4.3% (from 4.5%).