Russia’s manufacturing PMI contracts for the first time in 2021 on fresh coronavirus pandemic wave

Russia’s manufacturing PMI contracts for the first time in 2021 on fresh coronavirus pandemic wave
Russia's economic recovery splutters as producer prices soar, causing the manufacturing PMI to go into the red for the first time this year. / bne IntelliNews
By bne IntelliNews July 1, 2021

Russia’s strong economic recovery from last year’s crisis spluttered in June after soaring producer prices caused the manufacturing PMI to shrink for the first time this year.

The headline seasonally adjusted IHS Markit Russia Manufacturing PMI posted 49.2 in June, down from 51.9 in May and below the no-change 50 market, which signals a contraction.

The latest figure brings an end to a five-month sequence of improvement in the health of the manufacturing sector, as growth is hit by fears of a fresh wave of the coronavirus (COVID-19) pandemic, Markit said in a press release.

“Although only marginal, the downturn was driven by weak client demand and the first fall in employment so far this year. Nonetheless, manufacturers remained upbeat regarding their output expectations, with the degree of confidence improving,” Markit said.

Manufacturing as also been hurt by ongoing supply-chain disruptions which led to material stock depletion and further hikes in input costs.

The disruptions to the system have been serious and are now feeding through to produce price inflation, which has soared to 35.3% in May – its highest level since the series started in 2005. The Central Bank of Russia (CBR) is also worried about inflation and CBR Governor Elvira Nabiullina said this week that she would definitely hike rates again in July, possibly by as much as a full 100bp.

“Input costs were once again driven higher by supplier shortages and unfavourable exchange rate movements in June, according to survey respondents. The rate of cost inflation was among the fastest on record,” Markit says.

“Consequently, manufacturers raised their selling prices at a historically elevated pace, albeit one that was slower than that seen in May. Some firms stated that the softer increase stemmed from higher output charges negatively impacting client demand,” Markit added.

The higher cost burdens have led firms to further deplete their stocks of inputs during June. Pre-production inventories fell at their fastest pace since last October amid a marginal decline in input buying. Stocks of finished goods, however, decreased at a softer rate as some firms were reportedly able to replenish holdings amid lower new sales.

Markit reported that its panellists have sought to pass on higher input prices to customers, which is contributing to the inflationary pressures.

Amongst other contributors to the fall in the manufacturing index headline figure was a renewed decline in new order inflows during June. The decrease in client demand contrasted with a modest expansion in new sales in May, and was the fastest since November 2020.

The downturn in demand conditions was widely linked to reduced purchasing power at customers amid the surging costs.

The downward trend was also reflected in new export orders, which fell at the quickest rate for five months, reports Markit.

In contrast, output continued to expand in June, which was also reflected in the 11.8% growth of industrial production in May. “The rise in production was the sixth in as many months, despite being only marginal overall. The slowdown in output growth was, however, attributed to unstable demand conditions and lower new order inflows,” Markit reports.

“Weak client demand led to a reduction in pressure on capacity at the end of the second quarter, with backlogs of work falling sharply. The decline in work-in-hand was the strongest since the depths of the pandemic in May 2020,” Markit says.

As a result of lower production requirements and sufficient capacity to process backlogs, firms cut their workforce numbers in June. The decrease was the first round of job shedding in 2021 so far, but only modest overall. Overall, unemployment has been falling steadily since the peak in the winter and posted 5.1% in May.

Vendor performance continued to deteriorate in June, as suppliers' delivery times were extended significantly. Delays were commonly linked to raw material shortages and transportation issues.