Russia’s manufacturing continued its strong expansion in January rising to 52.1 in the month, up by 0.1 from a month earlier, according to the IHS Markit manufacturing Purchasing Managers' Index (PMI) index, well ahead of the 50 no-change mark.

January’s result was the sixth month of manufacturing expansion and underpinned by new orders, the survey’s respondents reported.

The result was good news. The service sector has been growing strongly for most of 2017, but manufacturing growth has been fragile as Russia’s economic recovery has failed to gather much momentum. Russian president Vladimir Putin confirmed on January 31 that the economy expanded by 1.4% in 2017, at the lower end of the Ministry of Economy’s forecast for the year. Russia’s economy is on track to expand by some 1.8% this year, according to official estimates.

Business activity in the Russian service sector showed a steep rise in November, with an increase in new orders and business activity growth accelerating to their strongest levels since January 2017, according to the IHS Markit report of December 5.

In contract the manufacturing PMI also showed some modest growth in November, although Russia's economic recovery remains uneven, at least on the output side and early fourth-quarter indicators undermine the ambitious goal of 2% short-term GDP growth.

The PMI indices contrast with Russia’s industrial production results which are a lot weaker. Russia’s industrial production expanded by only 0.5% in December, according to Rosstat, and was lackluster for most of 2017. There was a brief jump in industrial production in May last year, but that was caused by a surge in power consumption because everyone stayed at home as it rained all month that month.

As the PMI is based on interview with business leaders it tends to be more forward looking and so the recovery in the index is encouraging.

New business from abroad returned to growth, following a marginal contraction in December. Greater global demand for raw materials added pressure to supply chains with vendor performance deteriorating further. However, input cost and output charge inflation remained subdued in the context of the series history, IHS Markit said in a statement.

Production levels at Russian manufacturers increased further in January, with the pace of expansion quickening to the fastest since July 2017. Anecdotal evidence commonly attributed the rise in output to greater new order volumes and stronger client demand. In addition, more favourable global demand conditions were reflected in a marginal increase in new export orders.

Greater pressure on supply chains was reflected in pre-production inventory depletion. Panellists stated that current stocks were being used to fulfil orders in the production process despite growth in purchasing activity accelerating. Moreover, the latest fall in pre-production inventory levels was the fastest since June 2017.

The economy still has plenty of slack and despite the growth in orders factories are still nowhere near their maximum capacity utilisation. According to the latest Rosstat estimates manufacturing capacity utilisation is around the 65% mark, while that in the extraction industries is about 5% higher.

“Although manufacturing firms signalled a strong rise in new orders, there was little sign of capacities being under strain as backlogs contracted solidly and for the fifth consecutive month,” IHS Markit said in its report.

The pick up in orders has buoyed the mood amongst managers who are more optimistic about the near future. “Business confidence among goods producers was meanwhile robust and increased to a four-month high. Panellists suggested that optimism was buoyed by more favourable global demand conditions and the latest upturns in production and new orders,” IHS Markit reports. That is not borne out by the Rosstat business confidence survey, which has been in decline since June last year.

Commenting on the Russia Manufacturing PMI survey data, Sian Jones, Economist at IHS Markit, which compiles the survey, said: “Production growth across the Russian manufacturing sector continued to accelerate in January, and was the strongest since July 2017. The overall improvement in business conditions was also supported by a faster upturn in new orders. The latest survey data signalled a solid start to the year, with IHS Markit currently forecasting a 1.7% rise in industrial production in 2018.”

“Goods producers remained optimistic towards the year-ahead outlook, with the degree of confidence rising to a four-month high in January. A number of panel members stated that positive sentiment was driven by more favourable global demand conditions.”