Russia services PMI sees sharp rise in August’s business activity

Russia services PMI sees sharp rise in August’s business activity
IHS Markit's services PMI continued at its high bounce-back level, posting 58.2 in August, as all three of the PMI indices have now fully recovered from the coronacrisis
By bne IntelliNews September 3, 2020

The seasonally adjusted IHS Markit Russia Services Business Activity Index continued at its high bounce-back level, posting 58.2 in August, only slightly down from 58.5 at the start of the third quarter.

The upturn in business activity was the second-fastest since January 2017 as services complete their recovery from a crash to an all-time low of only 12.2 in April this year – by far the lowest level since the index was launched over a decade ago.

The result follows the release of the manufacturing PMI earlier this week that also saw the index return to the black, posting 51.1 for August. Any result above the 50 no-change mark represents an expansion. The manufacturing has been below 50 since April 2019.

Together the composite index extended its gains and posted 57.3 in August, up from 56.8 at the start of the third quarter, as private sector firms registered the steepest expansion in business activity since early-2017.

According to the three PMI indices the Russian economy has bounced back from the coronacrisis and is now expanding. However, the other mainstream indicators show that businesses are still suffering from a lot of pain. Industrial production is still contracting and was down to -8% in July, although the rate of contraction has slowed from the -9.4% the month before. Industrial production went negative after March, when it put in a mere 0.3% growth as the multiple crises hit that month.

Services have been a driver for the Russian economy as it slowly transforms from a production-based to a service-based economy. The Markit panellists attributed the rise in services to the resumption of client business and an associated increase in customer demand.

“The steep upturn was supported by a marked increase in new orders. As a result, firms expanded their workforce numbers for the first time since February, albeit at only a fractional rate, as backlogs of work continued to fall. At the same time, business expectations strengthened and reached a ten-month high amid hopes of an economic recovery,” Markit said in a press release.

Meanwhile, cost burdens grew at a sharp pace as operational and fuel expenses pushed input prices higher. Output charges rose only modestly, however, amid efforts to boost sales.

“Growth in new orders was driven by domestic demand, as new export sales fell for the sixth successive month. The pace of decline softened to only a marginal rate that was the slowest in the aforementioned sequence. Companies stated that the ongoing coronavirus disease 2019 (COVID-19) pandemic weighed on foreign customer demand,” Markit reports.

Another bit of good news is that companies started hiring again. After several years of record post-Soviet low unemployment at circa 4.5%, the jobless rate has risen this year to reach 6.3% in July, its highest level in almost a decade; unemployment was last over 6% in 2011.

August data signalled an increase in employment, thereby bringing to an end a five-month sequence of contraction, Markit reports. Greater workforce numbers were often attributed to more extensive business requirements. That said, the rate of growth in staffing numbers was only fractional overall, Markit added.

Reflecting an upturn in employment, firms were able to process backlogs of work in August. That said, the rate of reduction was only marginal overall and eased to its slowest since November 2019.

Business managers are also becoming more optimistic as hopes for a recovery build. Business expectations improved midway through the third quarter, with the degree of confidence reaching a ten-month high, according to Markit.

Prices also grew but inflation remains subdued thanks to the collapse in demand caused by the coronavirus lockdown. Average cost burdens increased at a steep pace in August, reports Markit.

“Higher input prices were often linked to greater fuel and business costs. The rate of cost inflation accelerated to a five-month high, but was slightly slower than the series average,” Markit said.  “Service providers were only able to partially pass on higher costs to clients, however, amid efforts to boost sales. Latest data signalled the second successive monthly rise in output charges, with the pace of increase accelerating to the fastest since March, but remaining only modest overall.”