Russia's manufacturing sector is still in a slump but the service sector continues its recovery on the back of positive real income growth. The Markit services PMI index remain above 50 (that indicates growth) for the fourth month in a row in May, posting 51.8, but down from April's three-year high of 54.2.
"The Russian service economy registered further growth of business activity and new work in May, building on the generally positive start made to 2016 so far. This in turn has led to a moderately confident outlook for the sector. Over 27% of companies expect activity to be higher in one year's time, against only 18% that forecast a fall," Markit said in a press release.
The result will be taken as more evidence of an anaemic recovery by the Russian economy. While the manufacturing PMI still remains below the no-change 50 mark, this index has also improved in the last two months, going from 48.3 in March to 49.6 in May. Overall, the PMI composite index remains in the black.
"Combined with the fractional upturn in manufacturing production signalled by Markit's PMI survey released on June 1st, this took the Composite Output Index to 51.2 in May, only a tick below April's 11-month peak of 51.3," Markit said in a press release.
The Russian service sector seems to be responding to a return to positive growth in real wages in the last months thanks to falling inflation. Real incomes have been falling for most of the last year but return to the black in March posting a 1.8% y/y growth.
"Companies in the service sector linked the inflow of new business to increased demand from both domestic and export clients," Markit said. "This contrasted to what was seen at manufacturers, where a slight reduction in total new orders was mainly driven by sharp decrease in new work from abroad." Four out of the six sectors Markit monitors said they registered an increase of both business activity and new orders in May.
The mild uptick has also filtered through to the jobs market where the rate of job cutting eased to a nine-month low.
Still more encouraging, even though the manufacturing PMI remains in negative territory, employment in the sector expanded for the first time in three years, suggesting that the positive sentiment that is already bolstering the service sector is now also starting to affect manufacturing.
"Taking the data from manufacturers and service providers together, this indicates that the overall rate of decline in private sector staffing levels slowed to a 21-month low in May," Markit reports.
Input costs and output charges at service providers both continued to rise in May. However, the rate of input price inflation eased to an 11-month low and remained below the long-run survey average (as it has since the start of the year). This was sufficient to offset a surge higher in the rate of manufacturing purchase price inflation, meaning that the combined pace of increase in costs across both sectors eased to a six-month low, Markit reports.
Increased price competition between firms to win new business is working to squeeze margins and continue the price inflation. Manufacturers reported a steeper increase in selling prices in May than in April, but the combined rate of inflation across the two sectors eased slightly. Russia's inflation has fallen from 12.9% in December to 7.3% in the last two months, however, economists expect it to rise again through to the end of the year; the bne IntelliNews consensus forecast of seven leading investment banks and IFIs predict an inflation rate of 7.63% for the full year.
However, sentiment is improving in the service sector were service over 27% of service providers expect business activity to increase over the coming year, compared to 18% anticipating a decrease.
Commenting on the Russia Services PMI survey data, Markit Senior Economist Rob Dobson said: "The Russian economy has been making steady progress so far in 2016, with the latest surveys suggesting that this positive start to the year was built on in May. Although growth slowed slightly in the service economy, its recovery extended into a fourth month. Manufacturing also showed better signs, with a slight increase in production taking the sector out of its recent downturn."
Sustaining the upturn will be reliant on the trend in demand, and there were better signals on this front too, Dobson added. "Service providers reported a further modest increase in new work received and although manufacturers saw a slight decrease this was mainly the result of a sharp reduction in new export orders. Overall, this points to signs that the domestic market is strengthening, which will hopefully continue as the trend in labour market moves closer to stabilising."