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Russian government slashes GDP forecast by a third

Russian GDP Including Forecast 2013-04-16Enlarge Graph

The Russian government slashed its 2013 GDP forecast from 3.6% to 2.4%, which is even lower than the consensus value of 2.9%.

The Ministry of Finance announced gloomy cuts to the forecast of several macroeconomic indicators ranging from consumer demand, investments and exports. Overall, the government is quite bearish about the economic prospects.

Two key industrial indicators were revised:

  • Industrial production: now 2% from 3.6%
  • Industrial capital investment: 4.6% from 6.5%

Inflation is the only indicator where the forecast increased, now at 5.8% from 5.6%. While out of range, at least the inflation forecast is within the target range of 5-6%, and much lower than the current value which sits above 6.5%.

The main problem is that cutting interest rates is unlikely to have meaningful effects according to economists and the central bank itself. The economy will be in need of a significant liquidity injection into the market to lower cost of debt and promote investments to spark growth.

In the short to medium term, the Russian market will likely continue trade sideways at best. Foreign investors may face even lower returns given the depreciation of the Russian Ruble.

For the rest of the year, the best advice is to focus on China and perhaps Brazil, but both India and Russia are stuck in a rut given the current situation prevents any fiscal stimulus from effectively boosting growth.