Russia’s service sector fell back into the red at the end of the second quarter as the S&P Global PMI index fell to 49.2 in June from 52.2 in May, below the 50 no-change benchmark. (chart)

“The fall in business activity was the first for a year, as slower new order growth pushed companies to adjust their output levels down. Moreover, businesses cut their workforce numbers again as expectations for the year ahead outlook slid to the weakest since July 2023,” S&P Global said in a note.

The contraction comes as the Russian economy contracted in the first quarter of this year in real terms, despite a nominal 1.4% of growth, as economic activity cools thanks to the pressures of the war. At the recent St Petersburg International Economic Forum (SPIEF) the leaders of Russia’s economic policy rebated if Russia was facing a recession or if the economy is merely cooling.

Russia’s manufacturing sector also recorded its sharpest downturn in more than three years in June, as weak domestic and international demand triggered renewed declines in new orders and output, S&P Global reported on June 30.  The headline S&P Global Russia Manufacturing Purchasing Managers’ Index (PMI) fell to 47.5 in June from 50.2 in May, signalling a solid deterioration in operating conditions. This was the third contraction in four months and the steepest since March 2022.

Taken together, the S&P Global Russia Composite PMI Output Index posted at 48.5 in June, down from 51.4 in May.

Input prices and output charges increased at historically subdued rates. The latest rises in costs and charges were the slowest since May 2020 and January 2021, respectively as inflation finally begins to fall, thanks to the extremely tight central bank monetary policy.

“In line with a slower uptick in input costs, firms moderated their own price increases in June. Output charges continued to rise, but the pace of inflation was the weakest for almost four-and-a-half years,” S&P said.

Employment fell across the private sector, marking the sharpest decline in headcounts since December 2022. June data showed back-to-back contractions in employment at services firms. That said, the rate of job shedding eased from that seen in May and was only marginal. “Companies noted that lower staffing levels were due to the non-replacement of voluntary leavers,” S&P Global stated.

While new orders in services continued to rise modestly, the pace of growth was subdued and well below the long-run average. “In cases where new sales did increase, this was linked by companies to customer referrals and competitive pricing,” S&P Global said.

Despite a slowdown in demand, backlogs of work increased, particularly in services, suggesting that firms are struggling to keep up with existing workloads even as new business growth moderates.

Price pressures continued to ease, with input costs and output charges rising at the slowest rates in years. “The latest rises in costs and charges were the slowest since May 2020 and January 2021, respectively,” S&P Global said.

Business sentiment weakened notably in June, with service providers’ expectations for future output falling to their lowest since July 2023. “Firms expressed concerns regarding headwinds to the sales environment,” S&P Global concluded.

Russian service providers recorded an eighth consecutive monthly increase in backlogs of work at the end of the second quarter. Anecdotal evidence suggested that greater levels of incomplete business were due to a sustained expansion in new orders. Moreover, the pace of growth in work-in-hand was the quickest in four months.

Despite a further rise in new business, the loss of momentum in client demand contributed to a lower degree of optimism in the outlook for output over the coming year in June.

“The level of confidence dipped to the lowest since July 2023 and was below the series average. Although firms hoped that new client wins and greater customer referrals would buoy activity, they expressed concerns regarding headwinds to the sales environment,” S&P said.

Moreover, private sector new order intakes fell, as a decrease in manufacturing sales coincided with a slower upturn in services new business. The overall decline was only slight, but it was the fastest since March.

 

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