The IHS Markit Russia Services Business Index posted a healthy 54.1 in May that held up the overall composite index which printed 53.4, but both numbers slid a little, down from 55.5 and 54.9 in April respectively. Anything over 50 denotes an expansion.

Russia’s service sector has been in the black for 28 months in a row now and pulled up the composite index. But the manufacturing index has done less well and fell into the red in May for the first time in two years, as bne IntelliNews reported this week.

The dink manufacturing took in May highlights the current economic recovery remains fragile and the real economy remains in desperate need of investment and structural reforms if it is to build up any momentum. Services is doing better as it is partly dependent on the booming e-commerce “new economy.”

Markit panelists reported that the rate of growth in new services business was down from the start of the year, but remained substantial. Client demand is up and backlogs in services continued to contract, says Markit. Meanwhile, price pressures remained steep, with the rate of input cost inflation the second-fastest since August 2016.

“Operating capacities showed no sign of strain in May despite new business growth outstripping that of output. Backlogs contracted for the eighth time in the last nine months, with the rate of depletion accelerating from that seen in April. Anecdotal evidence suggested the fall was due to more efficient business processes,” Markit said in a press release.

Demand is up, but that is not translating into new jobs yet. Service sector firms increased their payroll numbers only fractionally, reports Markit. “The rate of job creation softened for the third successive month and was the weakest in the current 17-month sequence of expansion,” says Markit. “For the fifth time in the last seven months, employment levels contracted in the manufacturing sector.”

Input prices continued to rise in May, placing strain on profit margins. The rate of inflation in the service sector was the second-fastest since August 2016 and marked overall.

“Where an increase in costs was reported, panel members largely linked this to higher wages and fuel prices. Goods producers also reported a marked rise in costs, with the rate of input price inflation accelerating to the fastest since September 2015,” says Markit.

Inflation is currently at historical lows of 2.2-2.4% but the Central Bank of Russia (CBR) says that it is expecting inflation to pick up this year and end 2018 at its target rate of circa 4%. The pick up in wages in services is probably a lead indicator of this. Rising oil prices have also dramatically driven up the cost of gasoline which is also inflationary.

Panelists told Markit that greater charges stemmed from higher input costs, which were partly passed through to clients. Similarly, manufacturing output charge inflation softened from April’s recent high. That said, the pace of increase was strong nonetheless.

Business confidence among services firms remained strong in May, despite dipping below the long-run series average. Expectations towards company performance over the coming year were driven by a sustained upturn in business activity and hopes of more favourable market conditions.

Manufacturers signalled a similar degree of confidence in the outlook for output for the coming year. Although the level of optimism dipped to a five-month low, it was robust overall.

“May survey data signalled a slight loss of growth momentum in the Russian service sector. New order growth also dipped, but remained strong overall. A lack of strain on capacities was reflected in the weakest rate of job creation in the current 17-month sequence of workforce expansion,” said Sian Jones, economist at IHS Markit. “Looking at the overall picture, the IHS Markit Russia Composite Output Index signalled a solid, but softer expansion in May. Weaker rates of growth in both the manufacturing and service sectors drove the dip in performance.”