Russia's economy proved unexpectedly resilient in the face of Western sanctions last year, but a return to pre-conflict levels of prosperity may be far off as more government spending is directed towards the military. Russia's low unemployment is evidence of a labour shortage which has become more pronounced since President Vladimir Putin ordered a partial mobilisation of troops that saw hundreds of thousands of mostly young, working-age men called up to the army or flee the country.
The economy ministry cast the year-on-year January GDP drop as evidence of Russia's continued recovery, following on from a 4.2% contraction in December and 3.8% slump in November.
"Construction continued to contribute positively to the economy in January," the ministry said. "The economy was also supported by growth of freight transport (excluding pipelines), the recovery of wholesale and retail trade, as well as increased output of manufacturing industries." Retail sales, a key gauge of consumer demand, were 6.6% lower in January, better than analysts forecast. Meanwhile, a business survey on Wednesday showed activity across Russia's manufacturing sector expanded quickly, although firms warned of accelerating inflation.
High budget spending is the key issue for the now hawkish Bank of Russia, which analysts expect to hold interest rates at 7.5% later this month, limiting economic growth prospects.
One ray of hope for the central bank was Russia recording a weekly consumer price drop for the first time since September at the end of February.
While Moscow tries present an optimistic, resilient picture, the data shows how living standards are falling, brought about by the fallout from Russia's "special military operation" in Ukraine.
Real wages, which are adjusted for inflation, fell 1% in
2022, data showed on Wednesday, further squeezing Russians'
purchasing power. Real disposable incomes also fell 1% last
year.
(Reporting by Darya Korsunskaya; Writing by Alexander Marrow
and Angus MacSwan)
