Russian service sector firms recorded another monthly expansion in business activity at the start of the third quarter, according to the latest July 2023 PMI data from S&P Global. However, as in manufacturing, the rates of growth for both output and new service business eased from June. (chart)

As followed by bne IntelliNews, despite the fallout from Russia's full-scale military invasion of Ukraine, the manufacturing sector ended 2022 with a historically strong expansion in output. The manufacturing PMI since January 2023 continued to trend in positive territory.

But the July manufacturing PMI report suggested that the sector is losing momentum and is running into capacity constraints, as indicated by rising input costs and inventory depletion. This is in line with most recent reports that Russian industry is operating at record-high capacity utilisation and is close to overheating. 

The seasonally adjusted S&P Global Russia Services PMI Business Activity Index registered 54.0 in July, above the 50.0 no-change mark, indicating expansion, but down from 56.8 seen in June. 

“The latest data signalled a solid expansion in service sector output, in line with the long-run series average, albeit the slowest since February amid some reports of emerging customer hesitancy,” the report noted.

As a result, the S&P Global Russia Composite PMI Output Index (manufacturing and services) posted 53.3 in July, down from 55.8 in June, showing a solid expansion in output across the Russian private sector, but at its weakest pace since February.

For the services sector, in July the rate of new order growth slowed notably from that seen in June, with the pace of expansion weaker than the series trend due to the “near stagnant” new export business at the start of the third quarter. 

As in manufacturing, service providers stated that logistics issues often hampered growth. Pressure also came from higher input costs due to the depreciation of the ruble against the dollar, pushing up imported goods prices, with supplier charges also rising.

So far, demand conditions “remained accommodative to higher selling prices”, allowing the service firms to pass through greater cost burdens to clients via a hike in output charges.

Nevertheless, service businesses remained optimistic in the outlook for activity over the next 12 months in July. 

“Confidence reportedly stemmed from planned investment in developing new product lines and reaching out to potential new clients. Expectations were weaker than those seen in June, however, and dipped below the long-run series average amid concerns surrounding some instances of customer hesitancy,” S&P wrote.