Russia’s seasonally adjusted IHS Markit Russia Manufacturing PMI index posted 46.5 in August, down from 47.5 in July, the third successive monthly deterioration in operating conditions across the Russian manufacturing sector. The decline in the health of the sector was the biggest since November 2020 and any result less than the 50 no-change mark represents a contraction.
The fall in the manufacturing PMI is likely to drag the composite PMI down to around the 50-mark from the 51.7 it posted in July. Services continue to expand, posting 53.5 in July but the services PMI has also been slowing in recent months.
The low base effects caused by last year’s lockdowns have almost entirely worn off. The economy ground to an almost standstill between April and July, when the restrictions were lifted and economic activity bounced back at the end of the summer in 2020 to almost pre-crisis levels.
However, the underlying economic activity this year remains strong, albeit slower now that the bounce effects are wearing off. Russia’s GDP growth in the second quarter of this year was 10.2% year on year – a high not seen since 1999, when the economy bounced back from the 1998 financial crisis that wrecked it and caused the top tier of Russia’s banking sector to collapse. The damage done by this crisis is far milder by comparison, with bankruptcies being limited to small and medium-sized enterprises (SMEs), largely in the services sector. No major companies have gone bankrupt.
August PMI data signalled another decline in operating conditions across the Russian manufacturing sector, Markit said.
“Driving the overall contraction were faster downturns in production and new orders, as domestic and foreign client demand weakened. As a result, pressure on capacity eased, with backlogs of work falling solidly and employment contracting at the fastest pace since November 2020. Nevertheless, output expectations strengthened amid hopes of a pick-up in customer demand over the coming months,” Markit said in its monthly report.
High inflation remains the main problem in the post-crisis economy, having been driven up to its highest level in several years after falling to post-Soviet lows in 2019.
The Central Bank of Russia (CBR) has made a series of rate hikes to get inflation under control – March (25bp), April (50bp), June (50bp) and July (100bp) – and consumer price inflation (CPI) is currently running at 6.5%. The central bank is expected to impose another 25-50bp hike at its meeting next week, but analysts say inflation has probably been contained now, although following Russian President Vladimir Putin’s promise to make $5bn worth of pre-election one-off payments to pensioners and servicemen, inflation may tick up temporarily to 6.7% in the coming months as a result.
“Inflationary pressures across the Russian manufacturing sector eased in August,” said Markit. “Although cost burdens rose markedly, the rate of increase softened to the slowest since September 2020. Where a rise in input prices was reported, firms linked this to hikes in supplier costs and material shortages. Nevertheless, the rate of output charge inflation accelerated from that seen in July. Manufacturers hiked their selling prices in an effort to pass through higher costs to clients where possible.”
Markit said that input costs for the manufacturing sector rose at their slowest pace for almost a year. In contrast, firms hiked their selling prices at a faster pace in an effort to pass on higher cost burdens to customers.
Demand in August was slowing, largely due to the evaporation of export orders. The rate of contraction was the fastest since November 2020. Alongside weaker domestic demand, total sales were dampened by a decrease in foreign customer demand. New export orders fell at a marked pace that was the quickest since May 2020, Markit reports.
“Lower new order inflows reduced pressure on capacity, as backlogs of work fell further. The decrease in work-in-hand was solid despite easing to the slowest for five months. As a result, firms cut workforce numbers for the third month running. The rate of job shedding quickened to the sharpest for nine months as firms reportedly did not replace voluntary leavers,” Markit said.
Prices have also been affected by the disruption to supply chains and rapidly rising commodity prices. Raw material shortages remained severe during August, reported Markit’s panel of business leaders, as vendor performance deteriorated markedly again. That said, lead times lengthened to the smallest extent for nine months amid a sharp decline in purchasing activity.
Firms continued to utilise stocks of purchases and finished goods to fulfil new orders. Post-production inventories fell at their slowest pace since January 2020, however, amid weak demand conditions, Markit said.
Finally, business confidence regarding the outlook for output over the coming year strengthened in August. Optimism stemmed from hopes of greater client demand in the coming months. Russian corporations are currently the most optimistic they have been at any time in the last decade.