Russia’s services sector continues its strong expansion

Russia’s services sector continues its strong expansion
By bne IntelliNews October 4, 2017

Russia’s services sector continues its strong expansion, leading manufacturing and putting yet another month of gains, according to IHS Markit’s PMI index.

The growth in the services PMI posted 55.2 in September up by a point from a month earlier and well above the 50 no-change mark. Services have also been dragging up the composite index, which posted 54.8 in September, up a jot from the 54.2 the month before.

The services report follows on from a decent, but not exciting, manufacturing report a week ago where the manufacturing PMI index was up slightly from 51.6 in August to 51.9 in September.

In general industrial production is growing but remains weak. Production expanded by 2.5% in September, a good result, but expanding by 1.5% and 1% in the previous two months.

However, services continue to outperform. Output levels rose at a strong rate and were supported by a steep upturn in new orders, reports Markit. The expansion in new business was the quickest since December 2012.

The rate of job creation also accelerated to the fastest in over four years, as Russia’s unemployment is at historic lows – just under 5% of the population.

One warning sign was the cost of inputs has been rising quickly, a lot more quickly than the headline inflation rate of 3.3% on an annualised basis, that was brought down by falling costs of agricultural goods at the end of the summer.

“Both input price and output charge inflation accelerated. However, the rates of inflation were both subdued in the context of the series history,” Markit said in a press release.

Business confidence is improving and reached an eight-month high, driven by robust client demand, Markit’s panellists said.

In general there was a strong increase in total business activity across the Russian service sector in September. The upturn was the quickest in three months and signalled a solid end to the third quarter. The pace of expansion of services was the fastest in nearly five years.

Services is one of the few Russian sectors that is adding new jobs and the current sequence of job creation has run for nine successive months, with the increase in staffing levels at the fastest since May 2013. Firms are hiring new workers in order to meet the growing number of jobs on order books. Goods producers also reported the first increase in staffing levels since February.

The increased cost of input prices was caused by the rising cost of raw material and labour prices. Although cost burdens rose at a strong rate, the pace was muted in the context of the series history, says Markit. Panellists linked higher output prices to the sustained rise in cost burdens.

Inflationary pressures are also intensifying in the manufacturing sector, with the rates of input price and output charge inflation both accelerating to ten- and nine-month highs respectively.

The Central Bank of Russia (CBR) resumed its monetary easing with another rate cut in September by a large 50bp, but CBR governor Elvira Nabiullina has warned the pace of cutting may slow from here as she is still worried by underlying inflation pressures – fears highlighted by the Markit survey.

Still, the new orders are clearly buoying owners and business confidence in the Russian service sector was robust in September. Output expectations for the next 12 months improved sharply to an eight-month high, Markit reports.  Similarly, firms in the manufacturing sector signalled stronger levels of confidence, and expectations were the most robust since May 2015.

IHS Markit currently forecasts Russian GDP growth in 2017 at 1.7%, with the latest survey data signalling a strong end to the third quarter.