The early signs of a Russian economic revival continued as the Markit Russian services PMI continued to climb in July to 55, its highest level in three and half years.
While the real economy is not doing well and GDP contracted by 0.9% over the first half of this year, according to the latest economy ministry release, the services sector has been a lot more buoyant. The services PMI started this year at 47.1 and any result below 50 on the index represents a contraction. However, the index has been rising every month since then, breaking above 50 in February for the first time since 2014.
“July service PMI survey data signalled the sharpest increase in business activity in Russia’s service sector for 41 months, driven by a marked rise in new business intakes. Outstanding business levels stabilised, ending a five-and-a-half-year period of deterioration, leading to the first increase in workforce numbers since February 2014,” Markit said in a press release.
The improvement in the services industry reflects the improving consumer sentiment after inflation, the macro economic indicator that Russians fear most, fell from a peak of 12.9% in December 2015 to 7.4% where it has been for the last four months. However, the expectation for the rest of the year is for a further fall in inflation.
At the same time, after being crushed by the devaluation of the ruble in December 2014, real wage growth went positive for the first time in over a year in June and the real disposable income have also stopped falling. Both results bolster consumer confidence and services are the first sector to feel the benefits.
The latest survey data also suggests that employment in the services sector is rising, which tallies with overall unemployment figures, which fell slightly in June.
“The rise in staffing levels [in services] during July was the first recorded in 29 months,” Markit reports. “That said, the rate of job creation was only slight. At the sub-sector level, sharp increases in employee numbers were reported by hotels & restaurants while financial intermediation firms registered a substantial decline. At the same time, job cutting was evident in the manufacturing sector. Consequently, private sector employment fell for the thirty-seventh month in succession.”
And the prices of services have continued their 80-month trend of rises in July. The rate of inflation accelerated to a four-month high last month, with panellists linking the rise to higher energy prices. Moreover, the increase was more muted than at manufacturing firms, where another robust increase in output charges was recorded. But rising prices didn't lead to rising profits, as costs are rising almost in step and tally with the inflation figures, which have been stuck around 7.4% for the last four months.
Industry yet to benefit
This rising confidence has yet to filter through into industry. While the overall PMI index has been in positive territory since January, the manufacturing PMI remains under the 50 mark. It stood at 49.5 in July, although it was positive in June at 51.5, the only positive result so far this year.
“Although the rate of expansion [in the services PMI] was the sharpest in 42 months, the latest rise was only fractionally stronger than the long-run average. Meanwhile, new orders levels at goods producers returned to contraction territory after expanding in June,” Markit said.
The real economy is now bumping along the bottom and the industrial production data paint a similar picture with the last few months reporting industrial production growth of between 0.5% and 1.2%, apart from a peak in June of 1.7%, the same month that saw the only positive manufacturing PMI result.
Industry is currently like a weak bird struggling to get in the air. The occasional gust of wind lifts it off the ground briefly, but it still doesn't have the strength to get completely airborne. However, the expectation is that the economy will return to growth in 2017 and possibly as soon as the second half of this year.
Samuel Agass, Economist at Markit, which compiles the survey, said: “After ending the first half of 2016 on a strong footing, Russian service providers carried that momentum into July after experiencing the sharpest increase in business activity for 41 months. The improvement was driven by further new business growth, with the rate of expansion accelerating to the fastest since January 2013.
“Encouragingly for firms, the stabilisation of backlogs ended a five-and-a-half-year period of decline and contributed to renewed job growth and stronger business confidence. It also suggests that growth looks likely to remain over the coming months and continue to support the total upturn in Russia’s private sector. ”