World Economy

Russia Recession More Painful in Construction Sector

Russia Recession More Painful in Construction SectorRussia Recession More Painful in Construction Sector

As Russia’s government counts the months to an economic rebound, a bellwether of investment is nearing levels of distress last seen during the throes of a recession seven years ago.

Building completions plunged 9% from a year earlier in May, the worst showing since October, even as industrial production grew for a second month and consumer indicators from real wages to unemployment improved. A gauge of business confidence in construction dropped to minus 19 last quarter, only two points above the trough reached in 2009, according to a report by an institute at the Higher School of Economics in Moscow, Bloomberg reported.

“The recession we are seeing in construction is significantly more painful than in other main industries of the economy,” said Georgy Ostapkovich, head of the Institute for Statistical Studies and Economics of Knowledge that conducted the study based on Federal Statistics Service data.

President Vladimir Putin is looking to harness investment to guide the economy from the longest recession of his 16 years in power after consumer demand collapsed and the worst oil crash in a generation clobbered the public finances of the world’s biggest energy exporter. Together with real estate operations, construction—which VTB Capital and Goldman Sachs Group Inc. say is a close proxy for investment—contributed almost 16% to gross domestic product in 2015.

  Record Slump

If the outlook and performance of the industry is any indication, an investment-led spurt will be slow to materialize. Capital spending has already posted the longest stretch of declines since at least 1995, when Bloomberg started compiling the data. The economy ministry forecasts it will shrink as much 3.1% this year.

A bout of falling prices is also afflicting construction, continuing uninterrupted since June 2015. In dollar terms, prices for real estate are down 65% since their peak in 2008. The ruble has appreciated almost 13% against the dollar this year after a 20% loss in 2015.

As Russians wait for prices to rebound, the risk is that the release of pent-up demand will eventually translate into a spike in prices and inflation expectations, according to Ostapkovich.

“Some potential buyers are caught in a deflation trap,” he said. “They are waiting for prices for housing to decline further, trying to catch the bottom.”