The Central Bank of Russia (CBR) cut its key policy interest rate by 25bp to 7.50% last week, ending the monetary tightening cycle that began in September 2018. The CBR cited slowing inflation (5.1% y/y in May, down from a recent high of 5.3% in March) and weak economic growth in H1 2019 for its move. This week, a second estimate by Rosstat confirmed that real GDP grew by just +0.5% y/y in Q1, down from +2.7% posted in Q4 2019. The supply-side breakdown reveals sharp output declines in Q1 for real estate activities (-3.5% vs. +0.3% in Q4), administrative & support services (-2.8% vs. +2.9%) and wholesale and retail sales (-3% vs. +2.2%). The latter is mainly due to the wholesale cluster as large traders increased stocks ahead of the VAT hike at the start of this year. Retail sales grew by +1.6% y/y in Q1 though it slowed to +1.2% y/y in April. Meanwhile, industrial production growth experienced a rollercoaster ride. After surging from +2.1% y/y in Q1 to +4.6% in April, it fell back to +0.9% in May. Overall, we forecast full-year growth to slow from +2.3% in 2018 to +1.3% in 2019 and +1.5% in 2020.
