The seasonally adjusted IHS Markit Russia Manufacturing Purchasing Managers’ Index (PMI) posted 51.6 in August, down from July’s reading of 52.7, but still ahead of the 50 no-change mark.

The result is in line with other indicators that showed a cooling of the economy in the summer after growth in the second quarter. Industrial production slowed in July to 1% y/y gain, slowing from 5.6% in May (due to very bad weather) and 3.5% in June. Likewise, GDP growth slowed to 1.5% in July y/y from 3.1% in May and 2% in June.

The Ministry of Economy said that the slowdown was temporary and this week upgraded its forecast for full year growth to 2.1% from 2%. The positive news is inflation has fallen dramatically to 3.4% y/y in August after a spike in May-July and will allow the Central Bank of Russia (CBR) to resume growth-boosting rate cuts at its next meeting in September. However, the real benefits from lower interest rates will probably not make themselves felt until next year.

In the meantime Russia’s recovery remains fragile and companies are muddling through. The rates of expansion in output and new orders both eased from July, and employment fell slightly, Markit reports. The slowing economy has impacted business confidence which fell to its lowest level since January 2016.

Despite the gloomy mood production among Russian manufacturers increased for the sixteenth month running, says Markit. Investment and consumption are both up as are real disposable incomes all of which is slowly contributing to demand.

“Anecdotal evidence indicated that the upturn in output was due to a greater volume of new orders. Despite easing from July, the rate of expansion was solid. In line with this, new orders received by Russian manufacturers expanded at a solid rate in August. Panellists linked the rise in new business to stronger client demand,” Markit said in a press release.

Russian goods producers reported a sixth consecutive month of decreasing workforce numbers in August. Although the pace of the downturn was only marginal, it was slightly faster than that seen in July. Lower headcounts partly contributed to a rise in backlogs for the fourth straight month.

 “August survey data signalled an extension to the current trend of input price inflation, which stretches back to February 2009. A number of survey respondents stated that cost burdens increased due to exchange rate fluctuations. Panellists also noted that a rise in average prices charged was caused by higher input prices, which were passed on to clients. That said, overall price pressures remained muted and weak in the context of the series history.”

This contrasts with the over all PPI inflation numbers, which have fallen from a two year high of 15% in February this year to 1.8% in July. CPI inflation has also fallen from the 5% in January high this year to 3.7% in August.

Despite increased prices, Russian goods producers increased their buying activity for the thirteenth month running in August. Pre-production inventories decreased at a solid pace, however.

Business confidence among Russian manufacturing firms remained positive in August. Panellists linked continued positive sentiment to new product development and new market opportunities, Markit reports.

That result is backed up by the Rosstat business confidence survey in August that went into positive territory of 1 and has been improving all year, having started at -8 in December and -3 in January. Consumer confidence remains in negative territory but has also been improving all year.

“That said, optimism was at a 19- month low with some respondents linking uncertainty to a slow recovery in consumer demand,” Markit say based on its own panel’s comments.

“August’s PMI reading indicated a slower, but solid improvement in overall operating conditions in the Russian manufacturing sector,” Sian Jones, Economist at IHS Markit, which compiles the survey, said. “IHS Markit currently forecasts industrial production to rise by 2.9% in 2017. Solid gains in output and new orders seen so far this year are expected to support the recovery. Price pressures within the sector remained historically muted despite the paces of both input price and charge inflation accelerating. Vendor performance also deteriorated to the greatest extent since May. Business confidence remained positive, although it slipped to the lowest since January 2016. Overall sentiment signalled uncertainty within the sector as consumer demand recovers slowly.”

Russia’s economy is still constrained by its structural limitations. BCS reported in a note this month that, “the economy continued to expand thanks to investment, which is mainly a function of continued infrastructure spending by exporters and the state, which, however, is not enough to offset weakness in other GDP components, most notably consumption and public spending. Therefore, we remain cautious on Russia's growth prospects this year, despite the strong performance seen in 2Q17.”

Rosstat’s monthly macro report for July shows that the Russian economy has clearly started to cool after a strong performance in 2Q17, when GDP expanded by 2.5% y/y.

Last month, the construction industry – a proxy of investment – demonstrated the strongest dynamic out of all the key segments of the economy and this is one of the three main economic growth engines. Construction volumes increased by 7.1% y/y after a rise by 5.3% in June and 3.8% in May.

Fixed investment has also been rising, another of the big growth drivers: fixed investment rose by 4.8% y/y in 1H17, which means that in 2Q17, investment rose by more than 7% y/y (vs 2.3% in 1Q17), the highest growth rate in 5 years.

However, the picture in all the other segments remained fairly bleak, according to BCS. Especially disappointing was the slow down in retail sales, the third of the big drivers. Retail turnover slowed to 1% y/y from 1.2% in June. Still, retain turnover has been negative for almost two years so any positive growth is a plus. But economists have been hoping for a faster pick up than this, which would add to the pace of the recovery.

The slow down in consumption and retail is linked to incomes. Real wages have been rising but real disposable incomes (the money that people can spend on themselves) is in and out of the black. After posting zero y/y growth in June, real disposable incomes fell again in July (-0.9% y/y), despite some acceleration seen in real wage growth (4.6% y/y vs 3.9% in June).