Oil rally helps to lift pessimism over Russia

Some of the gloom surrounding Russia’s economy seems to have lifted over the past month. The rise in oil prices has triggered a rally in local financial markets – the ruble is up by 12% against the dollar since the start of March. And the latest activity data confirmed that the economic slump has eased further. Our GDP Tracker points to a contraction in output of 2.0% y/y in Q1, an improvement on Q4’s fall of 3.8% y/y. That said, with fiscal policy likely to tighten and households still squeezed, the recovery will be lacklustre – we only expect the year-on-year GDP growth rate to turn positive in 2017. Meanwhile, the latest fall in inflation and rally in the ruble have raised hopes that the central bank will resume its easing cycle, perhaps as soon as this month. For our part, while we think the MPC will sound less hawkish, it will continue to tread cautiously, only turning to rate cuts later in the year.