Russian consumer demand, which came undone quickly during a recession, will take time to put together again.

The pieces don’t fit because households continue to embrace thrift even as the ruble tests new highs and inflation at the slowest in history boosts purchasing power.

While unemployment unexpectedly declined in December and real wages surged more than estimated for their fifth monthly gain, retail sales plunged 5.9pc from a year earlier, the Federal Statistics Service said last Wednesday. Their decline for a record 24th month was worse than all but one forecast in a Bloomberg survey of 13 economists, whose median was for a drop of 3.7pc.

Consumption, the main driver of Russia’s expansion in the past decade, is still brittle

With the economy on the cusp of recovery after its longest contraction in two decades, consumers are reluctant to spend after a currency crisis and a spike in inflation tore through household finances. That will calm nerves at the central bank by helping disinflation and keeping demand pressures weak, according to Bank of America Corp.

“People are still in crisis deleveraging mode and are acting thrifty, so any additional income isn’t spent,” said Vladimir Osakovskiy, chief economist for Russia at BofA in Moscow. “This supports deposit generation, but at the same time constrains spending.”

Consumption, the main driver of Russia’s expansion in the past decade, is still so brittle because broader economic gains aren’t translating into improvements for the millions of people who bore the brunt of the recession.

“An increase in poverty is causing a divergence between relatively positive income and unemployment figures and consumption patterns,” said Natalia Orlova, chief economist at Alfa Bank in Moscow.

Real disposable incomes fell the most in four months, shrinking 6.1pc in December from a year earlier, according to the statistics service. The median estimate in a Bloomberg poll of nine economists was for a drop of 5.1pc.

A poll published last Monday by the Higher School of Economics showed the financial situation worsened for 39pc of respondents in the past 12 months and improved for only 9pc. When asked about the future, 23pc believe their personal welfare will deteriorate in the coming year, with 11pc expecting it to get better.

“The population has already adapted to the new reality: in other words, tightened the belt by cutting spending as much possible and optimising its consumer basket to a lower level of incomes,” Georgy Ostapkovich, head of the Institute for Statistical Studies and Economics of Knowledge that conducted the study, said in an emailed research note.

The savings rate, at 10pc of disposable incomes in January-November, remains at almost double the ratio in 2008. Still, it’s fallen from 14.3pc in 2015, with the central bank mentioning a decrease in the propensity to save as a threat for its 4pc inflation target this year.

The average maximum deposit rate offered by the country’s 10 biggest holders of savings fell to 8.29pc as of Jan. 20, the lowest level since February 2014, according to the central bank.

To encourage savers, the central bank plans to hold interest rates above inflation.

Besides keeping down price pressures, the Bank of Russia is counting on the policy to help transform deposits into investment and ensure healthy growth for the economy. It left the benchmark rate at 10pc in December, while price growth slowed to 5.4pc from a year earlier.

“Consumers became much more cautious and rational,” said Vladimir Miklashevsky, senior strategist at Danske Bank in Helsinki. “We don’t expect a quick recovery in retail sales as cautiousness will remain, along with a high sensitivity of consumers to prices.”

—Bloomberg’s Zoya Shilova and Vladimir Kuznetsov contributed.

— Bloomberg/The Washington Post Service

Published in Dawn, Business & Finance weekly, January 30th, 2017