In June 2012, the Russian economy continued its growth. According to the Ministry of Economic Development, GDP rose by 0.2 percent compared to the May figure, without account for seasonal factors.

A positive contribution to GDP growth came from the construction and trade sectors, while manufacturing and agriculture negatively influenced GDP growth. Compared to the corresponding intervals of the previous year, GDP growth slowed 3.8 percent in the first half of 2012 and 4.2 percent in the month of May. In the second quarter, GDP growth slowed to 3.9 percent compared to the corresponding period of the previous year (it slowed 4.9 percent in the first quarter). Overall growth for the first half of the current year is estimated at 4.4 percent in relation to the growth of the first half of 2011.

The noticeable slowdown is not surprising: without the extra day in February, the growth in the first quarter amounted to 3.5-3.8 percent. As for April-June, with a low second quarter 2011 basis, growth could hardly be lower than in the same 3.5-3.8 percent range, according to Alexander Morozov of HSBC. The bad news is, he believes, that the seasonally adjusted growth, which reflects the state of economic activity, slowed from 0.9 percent in first quarter (which corresponds to 3.6 percent in annual terms) to 0.4-0.7 percent in the second quarter (corresponding to an annual growth of 1.6-2.8 percent if the economy will grow at the same rate for three quarters).

The cause of decline, according to the experts, is the weakening consumer and investment demand. Further, GDP growth will fall to 2-2.5 percent, experts believe. The warning signs have already appeared, according to Maxim Oreshkin of VTB Capital, as the growth in industrial production lost pace in June, slowing investment activity. According to the estimates of Renaissance Capital and the Russian School of Economics, in third quarter, GDP growth will slow to 3.3 percent of the corresponding period of 2011. In the fourth quarter the growth will decline to 1.8 percent.

The economic slowdown will occur against the backdrop of rising inflation due to the increased cost of food. In August, the increase will exceed 6 percent, a benchmark set by the Central Bank, which will raise rates in the fall, according to Oreshkin. The Central Bank will not be able to stop the decline in GDP growth, Morozov agreed. While the regulator has left rates unchanged and warned in its report of increased inflation risks, there is no distinct pressure on prices from the demand side. The Central Bank simply decided to wait until September to increase rates, according to Morozov. Rather than assuming a reactionary position, the regulator should have been proactive now, and increased the rates sooner without having to follow behind market expectations. On the other hand, the Central Bank would prefer to wait to get more information about the harvest, the 2013 budget, and the situation on foreign markets, analysts at MorganStanley noted. They expect to see rising rates in September.

According to Ivan Chakarov of Renaissance Capital, raising the rates would be a strategic mistake. Accelerating inflation was caused by the food price shock and the poor harvest, and it would be senseless to fight against such phenomena with monetary methods. From the viewpoint of monetary policy, there are no reasons for raising rates. Liquidity is tightened amid the slowing economy and adverse environmental conditions.

Industrial production in June 2012 went up 1.9 percent against the figure for June 2011. The share of the overall growth of industrial production from manufacturing activity was 91 percent. Manufacturing activity as a whole increased 3.4 percent. Within the manufacturing industry, the production of transportation equipment went up 14.8 percent; the manufacture of food products, beverages and tobacco went up 8.1 percent; the production of iron and steel and fabricated metal products went up 4.2 percent; the manufacture of coke and refined petroleum products increased 2.0 percent; and the manufacture of other non-metallic mineral products increased 5.2 percent. The increase in production and distribution of electricity, gas, and water in June was 2.1 percent; the activity’s contribution to the overall growth of the economy was 7.2 percent. The growth in mining activity was 0.2 percent, and its share of the overall growth of the industry was 1.7 percent.

According to Rosstat, the quarterly dynamics of industrial production to the corresponding quarter of the previous year went down to 2.3 percent from four percent in the first quarter. Overall, since the beginning of the year, industrial production growth was 3.1 percent lower than the corresponding period of the previous year.

With the exception of seasonal and calendar factors, industrial production in June fell by 0.2 percent. This decrease is due to the decline in the manufacturing sector (0.4 percent). Mining operations in June stabilized, as the production and distribution of electricity, gas, and water increased by 0.4 percent.

In the second quarter industrial production as a whole, excluding seasonal and calendar variations, slowed by 0.4 percent compared to 1.5 percent in the first quarter. The decline in the growth of production was associated with the decline in mining and production and distribution of electricity, gas, and water (0.3 percent), as well as with the slowdown in the manufacturing sector (0.6 percent compared to 1.2 percent in first quarter).

According to the Federal State Statistics Service, in June, investments in fixed assets increased 16.4 percent compared to May. The growth of investment activity slowed in June with the seasonal and calendar factors, while investment in fixed assets increased 0.2 percent compared to May (in May, the increase was 2.4 percent). Investment activity continued to decline in March, April, May, and June in relation to the corresponding months of the previous year (4.7 percent in June, 7.7 percent in May, 7.8 percent in April, and 17.0 percent in March). As a result, in the second quarter of 2012, investment growth slowed 6.5 percent compared to the corresponding quarter of 2011. The growth slowed down 16.3 percent in the first quarter.

The slowing growth of investments in fixed assets was accompanied by the reduction of profits of companies and organizations. In May, for the second consecutive month, the profits of enterprises and organizations declined compared to the same month of the previous year by 5.3 percent (after a reduction of two percent in April).

In June, job growth in the construction sector also slowed down, albeit to a much lesser extent. With regard for seasonal and calendar factors, job growth was 1.5 percent in June, versus 1.7 percent in May and 1.8 percent in April.

Meanwhile, the Finance Ministry totaled the results of federal budget execution for January-July of 2012. Revenues for the first seven months amounted to 7.248 trillion roubles (57 percent of the annual target). One year ago, for the same period, the federal treasury collected 1 trillion roubles less, some 6.234 trillion roubles. Spending in the seven months amounted to 6.965 trillion roubles (55 percent of the target). A year ago, spending was 1.45 trillion less, at 5.511 trillion roubles. As a result, the federal budget for the months from January to July 2012 registered a surplus of 283 billion roubles, or 0.9 percent of GDP. A year ago, in the first seven months, the state treasury recorded a surplus of 2.5 percent of GDP, which was three times larger than the current figure.

In May, the amended law on the 2012 budget was written with the deficit projection of 0.1 percent of GDP (68 billion roubles), instead of the 1.5 percent of GDP predicted earlier. According to government estimates, such a result would be possible if oil in 2012 would cost an average of USD115 per barrel. But as soon as the State Duma made these changes in the macroeconomic parameters of the budget, the price of oil came down. According to the Finance Ministry, the average price of Russian crude Urals from January to July was USD110.6 per barrel. In July, oil was USD102.6 per barrel, as the cost of major Russian export items were far behind expectations.

According to Deputy Economy Minister Andrei Klepach, his department is preparing to lower the 2012 average oil price forecast. In July, the head of the Ministry Andrei Belousov predicted that if the oil price in the second half of the year stands at about USD100 on average, the annual average price will be in the range of USD106-108 per barrel. For his part, Finance Minister Anton Siluanov predicts that the earlier state treasury deficit estimate of 1.5 percent of GDP is not at all unrealistic in the current economic environment.