November 20, 2017 / 3:44 PM / a year ago

UPDATE 1-Russian retail sales below forecast in Oct., challenge economic growth

(Quotes, comments, details, figures)

MOSCOW, Nov 20 (Reuters) - Retail sales in Russia, the country’s key economic indicator, grew less than expected in October as households’ incomes declined, data showed on Monday, challenging the country’s economic recovery.

The Russian economy is on track to grow by more than 2 percent after two years of recession, officials reckon. Recent data, however, raises questions about the durability of the economic recovery.

Retail sales, the gauge for consumer demand, Russia’s key economic growth driver, rose 3 percent in October compared with a year ago, a monthly set of data from the Federal Statistics Service showed.

That was below 3.9 percent growth predicted by a Reuters poll of analysts.

Retail sales grew less than expected as real disposable incomes of Russian households declined for the fourth month in a row, shrinking 1.3 percent in October compared with a year ago.

Although real wages are growing, other sources of income, such as from property and business, are falling because of mounting payments of debt and taxes, said Ekaterina Krylova, chief analyst at Promsvyazbank.

Real wages, which are adjusted for inflation, rose 4.2 percent in October, above 2.8 percent growth predicted by analysts.

“The still solid real wage growth is mostly a story of lower CPI with nominal wage growth staying within the range of recent months, and incomes clearly failing to show growth,” Dmitry Polevoy, chief economist at ING Bank in Moscow, said in a note.

Quarterly data on capital investment, the second most important growth driver, showed on Monday it rose by 4.2 percent in the first nine months of 2017 compared with a year ago, less than in the first six months when it grew by 4.8 percent.

“The surge in (capital investment) in the second quarter looked unsustainable given the moderation in corporate profit dynamics and no visible improvement in lending growth and business sentiment,” said Polevoy.

The latest data matches wider economic performance. The Russian economy grew 1.8 percent year-on-year in the third quarter of 2017, down from 2.5 percent in the second, the Federal Statistics Service, or Rosstat, said last week.

“Russia’s activity data for October suggest that growth remained soft at the start of the fourth quarter, at around 1.7 percent year on year,” Capital Economics research firm said in a note.

To revive economic activity, the central bank is widely expected to cut rates, given that inflation slipped below its ultimate target of 4 percent.

The central bank last trimmed its key rate to 8.25 percent at the end of October and promised to lower it further to 6-7 percent over the next two years.

NOTE - For key Russian indicators click here. (Reporting by Polina Nikolskaya, Zlata Garasyuta and Andrey Ostroukh; Writing by Polina Nikolskaya and Andrey Ostroukh; Editing by Andrey Ostroukh and Peter Graff)

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