Economic activity in Russia slowed as expected at start of year - Central Bank analysts

MOSCOW. March 12 (Interfax) - Economic activity in Russia slowed as expected at the beginning of 2026, the Central Bank's Research and Forecasting Department said in its latest Talking Trends bulletin.

"According to preliminary data and surveys, at the beginning of 2026, economic activity slowed down slightly as compared to the highs of December 2025 and Q4 2025 in general. This was expected as a similar trend was observed in early 2025 as well. The situation in the labor market continues to normalize gradually. The gap between growth of wages and that of labor productivity is narrowing steadily. This lays the foundation for a further increase in consumption and overall economic activity in 2026," the report says.

"Consequently, the acceleration of core sector output in the fourth quarter, which rose 3.5% seasonally adjusted, was temporary. The dynamics of output from traditionally less volatile consumer sectors also point to this. Along with most survey data, this indicates a gradual slowdown in economic activity. Judging by financial flow data from the Bank of Russia's payment system, this trend continued in early 2026," the report said.

The analysts said GDP growth (quarter-on-quarter, seasonally adjusted) in Q4 2025 was probably higher than in Q3, but "GDP dynamics in Q1 2026 are expected to be much more subdued."

"Firstly, there could be a repeat of the situation in Q1 2025, when GDP formally declined to the level of the previous quarter of the previous year, largely due to statistical accounting issues that somewhat exaggerated results for Q4. This makes a correct interpretation of statistical data released for January-March difficult," they said.

"Secondly, tax and regulatory changes have required businesses and the population to adapt. This in itself assumes consumer and business decisions may be deferred, which impacts economic activity. When the adaptation period is over, economic activity will likely pick up, primarily in the consumer segment. This will also affect the lending segment, where activity, as at the beginning of last year, temporarily declined," the Central Bank said, commenting on the VAT hike's impact on economic activity.

"Thirdly, there were fewer working days in January this year than a year ago. This affected both the year-on-year and month-on-month figures, as seasonal adjustment in such cases might not work entirely correctly," the Central Bank said, citing the calendar factor.

"Fourthly, business activity in a number of sectors, for example, construction, was negatively impacted in January by unfavorable weather conditions like severe cold and heavy snow, even for the time of year," the Central Bank said, adding that the weather was also a factor.

"An additional factor influencing economic activity going forward could be a lowering of the fiscal rule cutoff. If this is combined with a gradual transition to a zero primary structural deficit amid a lower cutoff, then the budget will curb growth in demand in the economy. Conversely, if the primary structural deficit is high, the budget will boost demand in the economy. This will create additional inflationary risks," the Central Bank said, commenting on the impact of the planned fiscal rule change on the economy.

Taking this into account, it will be possible to "talk about economic growth rates with more certainty only after results for the second quarter of 2026 are available," the Central Bank analysts said.