Russian service providers recorded a modest expansion in business activity during November, according to the latest PMI survey from S&P Global, but the rate of growth slowed somewhat from October. (chart)

The seasonally adjusted S&P Global Russia Services PMI Business Activity Index registered 52.2 midway through the fourth quarter, down from 53.6 in October.

“The index retreated further from August's recent high and signalled the weakest expansion in business activity in the current ten-month sequence of growth,” S&P Global said in a press release. “Although some firms linked higher output to solid demand conditions and a further rise in new business, others noted resistance among customers to higher prices.”

Any result above the no-change 50 benchmark represents an expansion.

The services PMI follows on from a slowing in manufacturing PMI released at the start of this month, which has been exceptionally strong in the second half of this year on the back of a military Keynesianism boost from heavy military spending by the state.

The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers' Index PMI was up to 54.5 in September from 52.7 in August in its biggest jump in five years, but cooled to 53.8 in November as the bump from war spending starts to wear off a little.

Combined, the S&P Global Russia Composite PMI Output Index came in at 52.4 in November, down from 53.6 in October, to signal a slower rise in business activity across the private sector.

“The softer upturn reflected weaker expansions at both manufacturers and service providers. Contributing to the slower rise in output was a moderation in the pace of new order growth,” S&P Global said.

However, despite the softening of the Russian PMI indices, they remain well ahead of the rest of Europe where the combined PMI indices remain deeply in the red thanks to a combination of the polycrisis, persistent high inflation, high energy prices, all made worse by the burden of the war in Ukraine due to the boomerang effect of sanctions, as recently described by bne IntelliNews. Europe’s manufacturing PMI rose to 44.2 in November from October's 43.1 but is still contracting. Almost all of the EU members turned in negative growth in the third quarter, however, most are expected to put in meagre growth in the last quarter of this year, thus avoiding a recession, except Germany which currently is reporting some of the weakest growth in Europe.

“The rate of growth eased notably amid a slower uptick in new business. Firms continued to expand employment, however, due to sustained pressure on capacity. Companies remained strongly upbeat regarding the outlook for output, meanwhile, with the degree of confidence holding close to October's four-and-a-half year high,” S&P Global said.

Unemployment has fallen to a fresh all-time low of 2.9% in October as the war drains the Russian market of labour that is also driving up nominal wages. In line with pressure on capacity, as evidenced by rising backlogs, firms expanded employment further. Moreover, the rate of job creation was the quickest for three months, according to S&P Global’s panellists.

That is also feeding inflation, which was up to 6.7% in November and broke through 7% on a week-on-week basis at the start of December. While Russia’s economic elite have managed to cope with the shocks associated with sanctions and the war spending well, inflation remains the main economic problem for the central bank which has been forced to hike rates several times this year already. Economists say another rate hike may be due but also believe inflation may have peaked and expect it to start falling in 2024, but not to return to the Central Bank of Russia (CBR)’s target rate of 4% before 2025.

“The rate of expansion [of services] was the weakest since July, led by a notable slowdown in the upturn in service sector new business. Despite a renewed drop in manufacturing new export orders, further strong international demand for Russian services supported an overall rise in new business from abroad,” S&P Global said.

A notably softer uptick in manufacturing input costs outweighed a slight acceleration in services expenses, as the overall rate of cost inflation eased to the slowest since June. Meanwhile, efforts to drive sales led to the weakest increase in selling prices for five months.

At the same time, cost pressures regained momentum. Input prices rose at a sharper pace, and one that was historically elevated. Efforts to remain competitive hampered firms' ability to pass through greater costs, however, as charges increased at the slowest pace since May.

 

Although growing at a solid pace, new business received by service providers recorded the weakest increase since May in November. The rate of expansion was softer than the long-run series average, amid some reports that lower purchasing power among customers weighed on demand, which is linked to the higher rates of inflation.

Meanwhile, new export orders rose at a marked pace. Russia has been cut off from its traditional markets in the west, but its trade with other members of the BRICS+ countries and friendly countries to the east, especially amongst the members of the Eurasia Economic Union (EUU), are booming.

“The rate of increase of new export orders was among the steepest in over nine years of data collection for the series, with the upturn supported by strong demand from neighbouring countries,” S&P Global said.

Hopes of further improvements in demand conditions, investment in marketing and expansion in customer bases spurred optimism at Russian service sector firms in November. The degree of confidence was little-changed from October's recent high and the second strongest since April 2019.