Economic conditions in Russia continue to deteriorate, with inflation surging to 15%Y/Y in January and all indications that a contraction in output is now underway. If sustained, however, the upward shift in the oil price so far in February offers a glimmer of hope that might help to stabilise Russia’s financial markets. And should the latest diplomatic effort succeed in taking the heat out of the Ukraine conflict, a further source of negativity surrounding Russian asset prices might become a touch less potent. Elsewhere, despite the persisting deflationary trend, Poland’s national bank kept its reference rate unchanged, but did not rule out a rate cut should deflation intensify. In Hungary too, prices continue to fall faster than expected and we certainly expect the national bank to respond. And despite a slightly more encouraging IP report, Turkish monetary easing seems likely as political pressure ramps up. Meanwhile, there remain mixed signals on Mexican business sentiment, but South African economic confidence has deteriorated due to heightened disruption to power supply. Russia In January CPI increased by 3.9%M/M, the highest monthly increase since February 1999 and also well above the consensus forecast. That took headline year-on-year inflation to 15.0%Y/Y in January, from 11.4%Y/Y in December and fully 2ppt higher than market expectations.
Perhaps most notably considering the disproportionate impact on the poorest, food prices jumped by more than 20%Y/Y with prices of grains, beans and pulses surging by 45% compared to a year earlier. The data were thus very discouraging, not least coming less than a week after the central bank’s (CBR) surprise key rate cut of 200bps to 15%. Nonetheless, while CBR Governor Nabiullina acknowledged that inflation will continue to rise over the near term, it should peak in Q215 before gradually subsiding as the impact of past rouble depreciation moderates. Therefore, she ruled out the possibility of a further U-turn on rates, supporting our expectation that further easing is likely in due course. The few economic data already published for January inevitably point to a deterioration in economic activity at the start of the year. Perhaps most strikingly, car sales plummeted by 24%Y/Y not least as payback from December’s “sales fiesta” as purchases were brought forward amid (justified) fears of accelerating inflation. And double-digit car price inflation seems bound to prompt a further drop in sales over coming months. The latest PMI surveys also signal ongoing underlying deterioration in economic conditions. The composite index decreased by 1.6pt in January to 45.6, the lowest level since May 2009. The service and manufacturing PMIs similarly fell to their lowest since the first half of 2009, by 1.9pt and 1.3pt respectively to 43.9 and 47.6 in January.
Perhaps surprisingly, the services incoming new business index rose slightly, but at 46.5 it continued to signal contraction ahead, particularly for the hospitality (hotel and restaurant) sector and also for transport and storage firms. Meanwhile, all subcomponents of the manufacturing survey were consistent with economic stress, with notable declines in the indices of new orders and employment, and an increase in the index of import prices to above 85, its highest since the 1998 rouble crisis. With the composite PMI below the key 50 level for the past fourth months, activity certainly appears to be contracting, probably by around 1.5%Q/Q in Q115. And that is also likely to be consistent with a full-year contraction of about 3-4%Y/Y
