Russian service sector growth accelerated again in July, picking up momentum from June’s recent low, defying a slowdown in manufacturing in the last three months and just keeping the composite business PMI index in the black. Total Russian services activity posted 52.8 on the IHS Markit Russian services PMI index, up from 52.3 in June and well ahead of the 50 no-change benchmark score.

However, the increase in services was not enough to outweigh the fall in the manufacturing PMI in July which has dropped for three months in a row and dragged the composite PMI business activity index down to 51.7 in July from 52 in June – still above the 50 no-change mark, but only just.

“The latest figure signalled the weakest rate of overall business activity growth since May 2016, reflecting a decline in manufacturing output,” Markit said in a press release.

The fall in the manufacturing PMI is mirrored in the fall of Russia’s industrial production results, which also dropped in June to 2.2% from 3.2% in May. Recent reports suggested that the government is bracing for a slowdown in 2018-2019.

Still, the Markit index was bolstered by the expansion in services which, although weaker than the rates seen at the start of the year, “was solid overall,” Markit says.

“Encouragingly, client demand increased with new business growing strongly. Pressure on capacity remained muted, however, as employment and backlogs continued to contract. Reflective of stronger demand conditions, output charges rose at the quickest rate for three months despite input price inflation softening,” Markit said.

Makit’s panellists said the growth in services was linked to greater new order growth and an increase in activity following the recent football World Cup. Unlike their service sector counterparts, manufacturers signalled a second monthly fall in new business. Backlogs and orders were falling at manufacturing firms, with the rate of contraction accelerating to the fastest since January 2016.

Services employment also fell in July: the rate of job shedding accelerated to the fastest since April 2016. Anecdotal evidence stated that the latest decrease in workforce numbers was due to June’s dip in client demand and more efficient business processes, reports Markit. The same is seen amongst manufacturing firms that also have reported seven months of decline in employment in the last nine survey periods.

On the price front, input costs in services continued to rise at a marked pace in July, despite the record low headline inflation rate of 2.3%. Although the rate of inflation softened to a four-month low, it was well above the series trend, says Markit. Panellists stated that the increase was largely due to higher fuel and labour costs. Gasoline prices have risen strong this year in Russia causing the Kremlin problems and real incomes and nominal wages are both rising. The Central Bank of Russia (CBR) is anticipating that inflation will rise over the next year to its target rate of 4%. Respondents commonly cited the pass-through of higher costs as the driving factor behind greater charges.

Service sector business confidence improved for the second month running in July, with service sector firms reporting a strong degree of optimism towards the year-ahead outlook for output. Positive sentiment was linked to hopes of further new business growth in the services sector. Conversely, goods producers reported the weakest degree of confidence in 2018 so far.

“Following June’s recent dip in momentum, July survey data signalled a slight pick-up in business activity growth in the service sector,” said Sian Jones, economist at IHS Markit, which compiles the survey. “The upturn in new orders also quickened as firms reported greater client demand and increased output following the recent football World Cup. Meanwhile, firms were better able to take advantage of a rise in client demand by increasing charges at a solid rate. An easing in input price inflation also reduced pressure on profit margins. On a less positive note, employment continued to fall, with the rate of job shedding accelerating, and backlogs fell for the eighth successive month. Although service sector expansion quickened, overall private sector output growth eased further, driven by the first contraction in manufacturing output since April 2016.”