The seasonally adjusted Markit Russia Purchasing Managers’ Index for manufacturers put in a surprise jump in August after contracting in July.

The index posted a 50.8 in August, where any number above 50 is an expansion, after putting in a disappointing 49.5 contraction in July. The manufacturing index has been lagging behind the services PMI which has been growing strongly for the last six months and hit a year-high of 55 in July. The service PMI has been taken as a harbinger for Russia’s economic recovery, but the contraction in the manufacturing index – negative results for six of the last eight months – says that the economy is struggling to take off.

Samuel Agass, Economist at Markit, which compiles the survey, said: “August’s headline PMI posted above the 50.0 no-change mark for only the second time since the start of 2016, after modest growth was recorded in both new orders and output. The rise in new business will come as welcome news to Russian manufacturers after experiencing stuttering demand conditions throughout 2016. Firms will now be hopeful that a steady sequence of expanding new business can be maintained throughout the coming months. However, with goods producers lowering both their headcounts and inventory levels, along with further declines in backlogged work occurring, future production growth may struggle to gain traction unless improvements in these areas can be made. Until that happens, the story of the sector’s inconsistent performance looks likely to continue.”

The August results will buoy Russia watchers as more evidence that this year’s economic contraction will be limited and Russia should return to economic health next year, as the Russian Ministry of Economic Development said in its latest forecast. 

The upturn in the sector was driven by modest production growth and higher new order intakes, Markit reports. However, workforce numbers contracted further while firms continued to lower their inventories throughout the month.

“For the fourth time in as many months, output at Russian goods producers expanded. That said, the rate of growth was only modest despite quickening since July. Although manufacturers recorded a higher volume of production, firms continued to reduce their post-production inventories. Moreover, finished goods stock has declined in each of the past 28 months,” Markit said in a press release.

Russia has record low unemployment at the moment of 5.3% of the work force, but manufacturers have been cutting jobs in an effort to optimise their production, the panellists told Markit.

Manufacturers are also under pressure from the rising cost of inputs; they have been reporting rising input costs in the last 91 monthly surveys including August.

“That said, the rate at which input prices rose in Russia’s manufacturing sector eased to a four-month low. According to anecdotal evidence, the rise in input costs reflected a combination of unfavourable exchange rates and higher raw material prices,” Markit said.

Russian goods producers raised their output charges further in August, extending the sequence of inflation to 13 successive months. However, the rate of increase slowed to a five-month low. This trend marries the Central Bank of Russia (CBR) efforts to reduce inflation which is expected to fall from the current 7.1% to 5% next year and 4% the year after.

Longer average lead times were reported in Russia’s manufacturing sector in August. Moreover, supplier delivery times have lengthened in each of the past 31 months, with panellists linking this to delays from European vendors.