July 17, 2013 / 3:17 PM / 4 years ago

Russian firms' investments fall, boding ill for growth

MOSCOW, July 17 (Reuters) - Russian companies' investments are shrinking, data showed on Wednesday, damaging the country's economic prospects and increasing chances of an early cut in interest rates to spur growth.

Capital investment - in tangible goods such as land, machinery or buildings - fell by 3.7 percent last month, the Federal Statistics Service said. It accounts for about a fifth of Russia's gross domestic product..

Economists and analysts have long identified low investments as a factor in Russia's economic slowdown, which has prompted the government to cut this year's forecast for GDP growth to 2.4 percent.

"We expect a government policy response to come soon, including central bank rate cuts already in August," Julia Tsepliaeva, an economist at BNP Paribas, said in a note.

The central bank left key rates on hold at its last meeting in July, but signalled policy easing ahead and launched a new facility providing cheaper access to one-year funds.

The fall in investment last month compares to double-digit growth a year ago and more than 20-percent increases last decade, when Russia enjoyed stellar economic growth.

The Economy Ministry has cut its forecast for growth in fixed capital investment this year to 4.6 percent from 6.5 percent.

The 2.4 percent GDP expansion envisaged for this year is less than half of the annual 5 percent Vladimir Putin promised to achieve as president prior to his election.

"Falling investment is the biggest issue limiting industrial production growth potential and overall upside in GDP growth," Dmitry Polevoy, an economist at ING Bank, wrote in a note.

"Unfortunately ... there are no real game-changing factors in sight, in our view."

Data earlier showed industrial output fell short of expectations in June, increasing by 0.1 percent.

But consumer demand is relatively buoyant, helped by declining inflation, which fell to 6.9 percent year on year in June from 7.4 percent in the previous month.

Retail sales rose 3.5 percent in June, as expected, while unemployment unexpectedly rose to 5.4 percent last month from 5.2 percent in May.

Disposable incomes were higher than expected and "the effects should be even more visible under a further expected decline in headline inflation in coming months," Polevoy said.

Reporting by Lidia Kelly; Editing by Douglas Busvine and John Stonestreet

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