The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers’ Index was unchanged at 53.8 in November, as the Russian economy continues to grow well above potential thanks to the military Keynesianism of heavy state spending on defence. Manufacturing has now expanded for 19 months in a row – the duration of the war. (chart)
“The Russian manufacturing sector reported sustained growth midway through the final quarter of 2023. New orders continued to expand sharply in November, despite a dip in exports, supporting further increases in output, employment and purchasing activity,” S&P Global reports. “Meanwhile, stocks of inputs were raised for the first time in seven months. Although companies recorded further marked increases in input costs and selling prices, rates of inflation eased markedly amid some signs of currency stabilisation.”
By contrast, the latest EU PMI results remain deeply in the red. Eurozone manufacturing PMI increased by 1.1pts to 44.2 in November as the cost of supporting Ukraine and elevated inflation and energy prices drag Europe down, although there are signs that the worst has passed.
“While it remains in contractionary territory, suggesting a broad-based weakness across eurozone countries, the pace of declines in output and new orders has slowed while expectations improved [in Europe],” S&P Global said.
In Russia, the key positive from the latest survey was another sharp increase in new orders, with the rate of expansion only slightly softer than that seen in October, when new business had risen to the largest extent since March 2011, S&P Global said.
“While demand overall remained buoyant, data suggested that this was mainly centred on domestic customers as new export orders decreased for the first time in four months. The pace of reduction was only marginal, however,” S&P Global said. “Continued marked improvements in total new orders meant that manufacturers increased their production again in November. The rate of expansion was solid, albeit softer than in October. The latest rise was the sixteenth in as many months.”
The war has drained the Russian labour market, leaving unemployment at historic lows. Rising demand has only put extra pressure on employers who are struggling to find workers, which in turn is driving up wages and hence inflation, which remains a serious problem.
However, the rapid growth of wages in Russia, caused by a sharp shortage of workers due to war and mobilization, has ended, writes RBC.
Official statistics clearly indicate this. In September, real wages grew by 7.2% in annual terms against 9.5% in August, nominal accrued wages by 13.6% against 15.1% a month earlier. The unemployment rate is at a historical low of 2.9%.
According to the forecast of the Ministry of Economic Development, in 2024–2026, real wages will grow by 2.5% per year, nominal wages by 7.7%.
Manufacturers looked to expand their workforce capacity again in November in response to higher new orders, through a combination of increased working hours for existing staff and the hiring of additional employees. As a result, employment increased solidly, and at a slightly faster pace than in October.
In response to the labour shortages, manufacturers are investing in improved productivity and capacity expansion that means firms were able to keep on top of workloads. Rather than styming the Russian economy, the restrictions imposed by the sanctions and the booming orders created by the state have pushed manufacturers to invest into production – imports of equipment have not been halted by sanctions, as technology sanctions have failed – and is making the Russian economy more productive.
Backlogs of work were reduced, following a first accumulation for ten months in October. Some respondents indicated that they had made efforts to ship finished products quickly, which also led to a further marked reduction in stocks of post-production items.
Purchasing activity expanded in November, according to S&P Global, although the rate of growth softened for the second month running to the weakest since April.
The sustained expansions in purchasing nonetheless enabled firms to build inventories of inputs for the first time in seven months, according to S&P Global’s panellists.
Those firms that purchased inputs during the month were faced with another increase in costs amid higher supplier charges and currency weakness. Consumer price inflation (CPI) is currently running at 6.7% and producer price inflation (PPI) is even higher and accelerating at 21.6% in October.
“The rate of input price inflation softened for the second month running, however, amid some signs of stabilisation in the against the US dollar,” says S&P Global. “In turn, the pace of output price inflation slowed sharply from the previous month but was still above the series average.”
Logistical issues continued to hamper the efforts of manufacturers to secure inputs. Lead times have now lengthened on a monthly basis throughout the past four years, although the latest deterioration in vendor performance was the least marked since June.
Hopes that new orders will continue to rise over the coming year supported confidence in the 12-month outlook for production. Import substitution was also a factor supporting optimism. Sentiment ticked down from that seen in October, but was still much stronger than the series average.