Russia's service sector business activity PMI index picks up to three-month high

Russia's service sector business activity PMI index picks up to three-month high
Russia's service sector business activity PMI index picks up to three-month high / bne IntelliNews
By bne IntelliNews September 5, 2018

Russia’s IHS Markit services PMI rose to a three month high in August of 53.3, up from 52.8 a month earlier and well ahead of the 50 no-change benchmark, Markit said in a press release on September 6.

The rising services PMI has also lifted the composite index that includes manufacturing, which was also up to 52.1 in August from 51.7 in July.

The overall index has been held back as the manufacturing PMI continues to be underwater, with a reading of 48.9 in August, slightly up from 48.1 a month earlier. The difference reflects to some extent the changing nature of the Russian economy and the boom in e-commerce that is also pulling down footfall traffic in Moscow’s leading shopping malls, according to the Watcom Shopping index.

However, Russia’s headline industrial production numbers were up to 3.9% in July from 2.2% a month earlier, suggesting that the recovery is still underway.

But the services sector remains the star of Russia’s economy. The August data signalled a solid rise in business activity across the Russian service sector and the rate of growth accelerated to a three month high, according to Markit.

New business also increased solidly despite the pace of expansion easing to the second-weakest since July 2017. The slower rise in new orders led to less pressure on capacity, with both backlogs and employment contracting further, Markit reports.

The service sector has been growing steadily now for over two years, with the PMI index rising above 50 in February 2016.

“Anecdotal evidence suggested growth was due to the acquisition of new clients, although some respondents noted less favourable market conditions. The increase was broad-based nonetheless, with only Real Estate & Business Services firms signalling a contraction,” Markit said in a note. “Manufacturers, however, indicated a third successive monthly decline in client demand.”

Lacklustre demand provided an incentive for services firms to streamline their workforce numbers, with the rate of job shedding quickening to the fastest since April 2016.

“The fall in employment was attributed to redundancies amid weaker new business growth and evidence of spare capacity. Meanwhile, goods producers signalled a modest decrease in workforce numbers, with the rate of job shedding softening from the previous survey period,” Markit said.

On the price front, input costs faced by service providers rose steeply in August. The whole Russian economy saw an increase in prices in July when CPI inflation broke above the 3% mark for the first time in two years, partly driven higher by the rising cost of oil. The PPI inflation is now in double digits and was 16% in July. On top of that US sanctions fears caused the ruble to lose 17% of its value against the dollar YTD and the devaluation effect is already feeding into inflation.

“That said, the rate of input price inflation dipped to a five-month low and was below the series average. In contrast, manufacturing firms registered a faster rise in input costs, with the rate of inflation reaching a three-month high,” according to Markit.

Business confidence among service providers towards the outlook remained strongly positive in August, despite the degree of optimism dipping to a 12-month low. Panellists linked growth forecasts to advertising and new products, reports Markit. “Manufacturers were also generally optimistic, with the degree of confidence reaching a four-month high,” the company said.

Sian Jones, economist at IHS Markit, which compiles the survey, said: “Russian service sector business activity growth accelerated in August, with output increasing at a solid rate. New business also expanded solidly, but the pace of growth eased from July due to more fragile demand conditions in some areas. As was seen in manufacturing, there was further evidence of spare capacity among service providers, as employment and backlogs continued to contract. Despite a sharp rise in cost burdens, services firms raised charges only moderately amid reports of greater competition and fragile client demand. Although the latest IHS Markit Russia Composite Output Index picked up from July’s 26-month low, signs of greater spare capacity and a weaker rate of new order growth could weigh on future expansion.”