Russia’s manufacturing PMI put in a marginal rise in March up to 50.6 from 50.2 a month earlier and only just above the 50 no-change mark in the IHS Markit index, a composite snapshot of manufacturing actively based on a monthly survey.

While the services PMI has been doing very well in recent months, rising to 56.5 in February from 55.1 in January and lifting the overall index, manufacturing has failed to take off.

The poor manufacturing results mirror the lacklustre performance in the official industrial production results in the last quarter, which slowed noticeably, probably due to heavy cuts in defence spending, BSC Global Markets chief economist Vladimir Tikhomirov speculated in a recent interview with bne IntelliNews.

Russia has emerged from a two year economic recession and rising real incomes have lifted demand and will contribute to the 1.8% growth forecast by the Russian economics ministry, but the recovery remains fragile and partly dependent on oil price dynamics this year.

The Markit March survey data indicated a “marginal improvement in operating conditions across the Russian manufacturing sector.”

“Overall growth was slightly stronger than that seen in February but below the long-run series average. Output and new orders increased at weaker rates, with new business growth easing to the slowest in the current 20-month sequence of expansion. Inflationary pressure meanwhile remained muted in the context of the series history. Business confidence dipped to a three-month low, but was strongly positive overall,” Markit said in a statement.

The March result was the second weakest since June 2017, and the first quarterly average for 2018 (51.0) is the weakest since the third quarter of 2016, Markit says.

However, while the result is not spectacular, manufactures have gone back to work and output was rising steadily, even if the rate of expansion had slowed to a five-month low. Anecdotal evidence attributed the sustained increase to a continued upturn in client demand, reported the consultant.

And manufacturers are continuing to receive new orders, even if the pace of growth in new orders slowed in March.

“The rate of increase [in new orders] was the slowest in the current 20-month sequence of expansion. Although some panellists linked the rise to the acquisition of new clients, others raised concerns regarding signs of more fragile demand. That said, export order growth remained solid overall,” Markit said.

The slower growth means there is some spare production capacity in the system, despite backlogs in orders and falling unemployment, which remains at record lows of about 5%, although the rate of job shedding was only marginal.

Inflation is also at a record low, but companies are seeing costs increase. While the consumer price index was also at a record low of 2.2 in February, the producer price index remained at an elevated level of 5% in January and 5.7% in February, albeit down from 8.4% in the last month of last year. Increases in raw material prices are driving prices higher for producers.

“Panellists reportedly passed on higher costs to clients through a rise in charges. That said, inflationary pressures remained muted in the context of the series history, despite rates of both input price and output charge inflation accelerating,” said Markit.

Finally, expectations towards the year-ahead outlook for output dipped to a three-month low but remained strong overall, said Markit. Survey respondents linked optimism to product development and hopes of more robust client demand.

Commenting on the Russia Manufacturing PMI survey data, Sian Jones, economist at IHS Markit, said: “March survey data indicated a marginal improvement in operating conditions across the manufacturing sector. Although the overall pace of growth was faster, both output and new orders expanded at weaker rates. Moreover, average growth in the first quarter of 2018 was the slowest since the third quarter of 2016. Meanwhile, despite both input price and output charge inflation accelerating, rates of increase remained subdued in the context of the series history. Although output growth eased for the second successive month, business confidence was nonetheless strong in March. Those expecting output to rise over the next 12 months attributed their optimism to new product development and hopes of more robust client demand.”