The seasonally adjusted S&P Global Russia Services PMI Business Activity Index just about broke even, posting 50.5 in April, down from 51.4 in March and only just above the 50 no-change benchmark. S&P Global reported on May 6. (chart)

The services PMI result indicated only a marginal upturn in output at Russian services firms as the economy begins to cool and the bump from the military Keynesianism of heavy military spending starts to wear off.

“The rise in services activity was the slowest in the current 15-month sequence of growth and well below the series average. Although firms continued to note that incoming new business supported the increase in output, some incidences of softer demand conditions weighed on the expansion,” S&P Global said in a press release. “Business activity rose at the weakest rate in over a year, as the increase in new orders lost pace amid some reports of less robust demand conditions.”

Russia’s slowing service sector contrasts starkly with the manufacturing PMI which posted a robust 54.3 in April, down from 55.7 in March, but still well ahead of the no-change mark. Russia’s manufacturing sector is still benefiting from the Kremlin’s militarisation of the economy and expansion is led by manufacturers, even if that too cooled slightly in April. (chart).

“The latest manufacturing expansion was stronger than the series average despite softening to the slowest in three months,” S&P Global said in a press release on May 2. “Although expansions in output and new orders softened slightly from March, they remained robust,” S&P Global said.

Combined, the weaker services result pulled the composite PMI output index to a still healthy 51.9 in April, less than the 52.7 posted in March, to signal the slowest rise in private sector activity in the current 15-month sequence of expansion. The softer upturn in output was mainly the result of only a marginal increase in service sector activity.

“Slower expansions in new business at manufacturers and service providers led to the joint-weakest upturn in total new sales in almost a year. Despite a renewed rise in services new export business, a solid decline in manufacturing export orders drove a downturn in new sales from abroad,” S&P Global said.

Orders still rising

Despite the cooling economy, service providers still saw a rise in orders in April, albeit at a slower pace than in the first quarter.

“Companies noted the acquisition of new customers and higher intakes of work from abroad as drivers of growth. That said, the rise in new sales was only modest and the weakest in the current sequence of expansion that began in February 2023,” said S&P Global.

Total new sales grew at the slowest rate in the current 15-month sequence of expansion and employment continued to rise as expanded capacity helped firms reduce backlogs of work for the first time since last July, the consultants added. “Confidence in the outlook, though still positive, dipped to its lowest level in nine months,” S&P Global added.

Service inflation

Persistent inflation remains the main headache, running at a high 7.6% in March, despite the fact that the Central Bank of Russia (CBR) has hiked rates to a crushing 16% and left them on hold in April. (chart)

In its latest macroeconomic survey in April, the CBR forecasts that inflation will fall to 5.2% by the end of this year, but the regulator admits there is a lot of uncertainty, due to the unpredictability of the war. Both service providers and manufacturers continue to pass on the rising cost of inputs to their customers. The edge has been taken off rising prices, but despite the cooling economy, prices are still going up, according to S&P Global.

“Despite having accelerated slightly from the month before, the rate of input cost inflation was softer than the series average. Meanwhile, firms hiked their selling prices at the slowest pace since January 2021 and the pace of selling price inflation was the joint-weakest since November 2022 amid efforts to drive new business. Although companies commonly sought to pass through greater costs to customers, the pace of output charge inflation eased to the slowest since early-2021.

Labour market remains tight

The other headache the economy is dealing with is the lack of labour after hundreds of thousands of men were drafted to the army in 2023 and some 30,000 volunteers continue to sign up each month. As a result, unemployment has fallen to a post-Soviet all-time low of 2.8%. (chart)

The lack of labour has been pushing up nominal wages that are rising at about 10% – faster than inflation, pushing up real wages and as a result consumption.

“Higher wage, supplier and advertising costs were often highlighted by panellists as factors leading to input price inflation,” S&P Global said. “Although the increase in demand softened in the month, firms continued to take on new workers in April. Employment growth remained solid and contributed to a renewed fall in backlogs of work.”

In line with greater staffing capacity, service companies were able to work through their outstanding business in April, with backlogs falling for the first time in nine months. The rate of decline was solid and the sharpest since January 2023.

“Finally, business confidence across the Russian service sector remained upbeat in April. Firms anticipated greater output over the coming year, albeit with the degree of optimism dipping to a nine-month low,” S&P Global reports.​