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30 Aug, 2010 09:18

Seasonal slowdown worsened by long hot summer

Seasonal slowdown worsened by long hot summer

Extremely hot and dry weather has forced economists to increase their forecast on inflation rate on the back of decrease in production sector and price jump.

The deputy minister of Economic Development and Trade, Andrey Klepach, has announced statistics for July, and predictions for the year were the first official estimates of the macroeconomic damage from abnormal heat afflicting Russia for more than two months.

According to the deputy minister, the year on year GDP growth in July 2010 was 2.5%, following a 7M 2010 3.8% increase year on year. However, the "month to month" dynamic seems pessimistic with a GDP slump by 0.3% in June 2010 after same upturn in May 2010, a seasonal factor excluded.

Klepach pointed out the negative impact of the extreme weather conditions on several industrial productions along with the agricultural sector loss.

“Industrial production in Russia slipped over two consecutive months, showing a 0.8% fall month to month in July 2010 assuming seasonal factors. Steel production, construction and agriculture are among the major suffering sectors of the Russian economy due to the summer heat and drought,” Klepach said.

The Ministry of the agriculture has estimated heat and drought damage to agricultural sector by 27% loss of harvest and a 32.7 billion rouble expenditure on sector recovery.

Evgeny Gavrilenkov, chief economist at Troika Dialog, believes that the overall rate of economic growth will not suffer a significant loss as the agriculture sector accounts a small part in the total GDP

“Agriculture, forestry and hunting provide a total of 3.9% of GDP, which is comparatively small share to bring a significant impact on the economy,” says Gavrilenkov.

Yet, Klepach noted a direct impact of extreme weather conditions on delay of the economic growth.

“In general, the extreme weather conditions may slow down the growth of the Russian economy at least by 0.7-0.8 % or even more, with the direct losses from the drought tallying to 0.4-0.5%,” he estimated.

The weak investment demand has added to the slowdown of the economy, along with the drought impact, according to the data of the Ministry of Economic Development – total investment fell by 2% month to month in July 2010, assuming seasonal and calendar factors.
Gavrilenkov assumes that the investors reduced their appetites due to seasonal factors

“It is a temporary, seasonal factor which can be tracked since, for example, June 2008 year on year shortfall of 9% in investment,” the economist notes.

Deputy Minister Klepach reckons that a significant fall of export activity and provocative increase of market prices have suspended the economy recovery and production growth.

“The economy has been undermined already in August, while it was expected to slow down later in autumn, with a hike in the inflation rate and a shortfall of export in the 2H 2010. By the end of the month, we expect a slowdown in price increases. On the whole the inflation rate will add 0.5% by the end of August,” Klepach stated.

The recovery process will take more time now, after tough and severe summer months. Russia has not yet overcome the effects of the global financial and economic crisis and will continue to implement anti-crisis measures, notes Prime Minister Vladimir Putin.

"Just like the whole world economy, our own Russian economy is emerging from the crisis gradually. Our own exit will not be rapid either, so it is very important to determine whether we consider we have emerged from the crisis or not," the PM said.