Russia’s IHS Markit service business activity index came off the boil slightly in March, falling to a still robust 54.4, down from 55.3 a month earlier, but thanks to the stronger than expected expansion in manufacturing the overall composite index rose to 54.6, Markit said in a press release.

The rate, which remained well above the 50 no-change mark, was the slowest in three months and comes in contrast to the manufacturing index release two days earlier that picked up significantly to 52.8 from 50.1 over the same period – the strongest manufacturing PMI result in two years.

The result was the composite PMI index was lifted to 54.6 in March, up from 54.1 in February – the fastest growth since last November. For most of the last year services have been growing strongly whereas manufacturing has been lacklustre, but now the two indices have converged somewhat. What has changed is whereas services were driving the PMI composite growth in 2018, March saw a much more balanced expansion, with manufacturing playing a much more important role. The overall rate of increase was the fastest since November 2018.

“Where a rise was reported, panelists linked this to a further rise in new orders and client demand. Activity growth over the first quarter as a whole was slightly sharper than that seen over 2018,” Markit said.

Another contrast with manufacturing producers is service companies are significantly less optimistic about the outlook for the rest of the year. “Panelists expressed the lowest degree of optimism in future output growth since last August,” Markit said. Business expectations amongst service providers moderated to a seven-month low amid reports of softer underlying demand and intense competition.

The contrast between manufacturing and services might be explained by the contrast in general economic activity where GDP growth is growing slowly but real incomes in Russia fell again slightly in 2018, down for the fifth year in a row. There is almost no “trickle down” effect working in Russia at the moment.

Inflationary pressures have also eased faster than expected following January's VAT-related high. Rates of both input cost and output charge inflation remained elevated and broadly in line with their respective series averages.

One bright spot was foreign customer demand strengthened. The upturn in new export business was the sixth in as many months and the fastest in the series history since September 2014.

Commenting on the PMI data, Siân Jones, economist at IHS Markit, said: “Russian service sector output growth remained solid despite less marked expansions in business activity and new orders in March. A stronger improvement across the manufacturing sector supported faster rises in private sector output and new business. A further reduction in pressure on capacity following greater efficiency led to only marginal employment growth, however. The effects of the recent hike in VAT continued to peter out in March, with inflationary pressures softening from the highs seen at the start of the year. Nonetheless, input prices and output charges both rose at elevated paces. With inflation currently at 5.2%, the Central Bank of Russia expects price rises to peak in the March-April period and then dip to the 4% target during the first six months of 2020."