Russia’s manufacturing PMI sinks for the second month in a row as economy continues to slow

Russia’s manufacturing PMI sinks for the second month in a row as economy continues to slow
IHS Markit Russia Manufacturing PMI dropped again to 46.9 at the start of the fourth quarter, down from 48.9 in September
By bne IntelliNews November 2, 2020

The slowdown that started in September slowed some more in October as the IHS Markit Russia Manufacturing PMI dropped again to 46.9 at the start of the fourth quarter, from 48.9 in September. The overall decline in operating conditions was the fastest for five months, said Markit in a press release on November 2. Any result below the no-change mark of 50 represents a contraction.

The manufacturing index collapsed to never before seen levels in April, but as the Russian lockdowns were lifted at in late summer the economy quickly bounced back, largely driven by a surge in consumption.

However, a second wave of the coronavirus (COVID-19) epidemic re-appeared in the last weeks of September to take the wind out of the sales [sic] and analysts were surprised by a slowing of economic activity in September that started before the renewed spike in infection rates had really got underway.

The manufacturing PMI bounced back from April’s low of 31.1 to go back into the black in August, posting 51.1, but that growth was short-lived, as by September the PMI was contracting again, partly pulled down by the slowdown outside Russia.

The services' PMI has done better and returned to a very strong growth of 58.2 in August and has remained above water since then, which in turn has kept the composite index above 50 as well since August.

Industrial output in general has failed to build up any momentum in the second half of this year and declined by 2.9% year on year in January-September, according to the revised data from the RosStat statistics agency.

“October PMI data signalled a continued deterioration in the health of the Russian manufacturing sector. The overall decline was the fastest since May, amid a renewed fall in production and a quicker contraction in new orders.” Markit said in a statement. “Spare capacity persisted, meanwhile, as firms shed more workers. Weaker client demand weighed on business expectations, as optimism sank to a five-month low.”

The rate of job shedding was faster than the series average despite easing from that seen in September. Evidence of excess capacity was seen through another monthly depletion in backlogs of work. The pace of contraction accelerated to a strong rate as lower new orders allowed firms to process work-in-hand.

On the price front, the rate of input cost inflation accelerated notably to its fastest since August 2018. The CBR is worried about rising inflation, also driven by a weakening ruble, which dropped through the important RUB80 to the dollar line at the open of trading on November 2. However, in October firms were able to partially pass on higher costs to clients, despite subdued demand, says Markit.

Supplier shortages contributed to a spike in cost burdens. Input prices rose at a marked pace that was the sharpest since August 2018. Some survey respondents also noted that unfavourable exchange rates had pushed up import prices.

Reflecting weaker demand conditions, goods producers registered a further fall in new order inflows in October, with some firms saying that even special deals and discounts were not enough to entice customers to place orders. The decline, however, was almost entirely driven by domestic business as new export orders rose for the first time since December 2018. The devaluation of the ruble has made Russian goods increasingly competitive and has been driving the development of a light manufacturing base to service the demand for domestic consumer goods and which is now starting to export its products.

Falling orders have led to falling business confidence, which in October dropped to its lowest since May. Uncertainty regarding the coronavirus (COVID-19) pandemic and the longevity of restrictions continued to weigh on optimism. Firms were upbeat overall, though, that output will rise over the 12 months ahead.

Inventories continued to decline as firms sought to reduce costs and supplement production through the use of stocks to fulfil new order requirements.