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Russia’s manufacturing PMI returned to the black numbers, rising to 51.1 in August from a slight contraction of 48.4 in July and completing the recovery from the total collapse of the index in the second quarter due to the corona crisis.
The manufacturing index plunged to a record low of 31.1 in April as the impact of the Russian economy lockdown due to the epidemic took hold, according to IHS Markit, which produces the index.
The return to manufacturing expansion, a result above the 50 mark with no change, represents growth, is the first gain in more than a year and the last of the three indicators to return to the black. Russia’s services PMI rebounded to 58.5 in July, bringing the composite index up to 56.8 in the same month, despite a slight contraction in manufacturing.
The recovery of the manufacturing PMI is not yet reflected in the industrial production index, which fell 8% in July, but here too the contraction rate decelerates from -9.4% in June and -9.6% in may. The Bank of Finland Institute for Economies in Transition (BOFIT) reports that in some sectors, especially agriculture, production has already recovered and is now above pre-crisis norms; however, retail sales have fallen in all regions of Russia except Chukotka.
The manufacturing growth expansion was the first since April 2019 amid a faster rebound in production and a renewed surge in new orders, Markit reports. As a result, employment fell to its slowest pace in a year, as the rate of contraction in job backlog also eased. Companies remained optimistic in August, despite a slight moderation in sentiment.
Meanwhile, higher prices from suppliers pushed up input costs in the middle of the third quarter, and companies were only partially able to pass the higher cost burdens onto customers through higher fees.
“The recovery was strong overall and the sharpest since March 2019. Some companies claimed that a rebound in customer demand had fueled increased production,” Markit said. “Anecdotal evidence attributed the sales growth to new customer acquisition and higher customer demand. Although only slight, expansion in new business was the fastest since April 2019. Meanwhile, new export orders fell only marginally and at the slowest pace since May 2019. Panelists continued to state that demand from foreign customers was historically weak ”.
The slowdown has affected employment, with Russia’s unemployment rate rising 2 percentage points in recent months to 6.3% in July, its highest level in nearly a decade. Unemployment exceeded 6% in 2011.
The number of workers declined further in August, albeit at the slowest pace since March 2020, Markit says. Companies continued to report an increase in layoffs amid tough demand conditions. At the same time, backlogs also contracted at a smoother pace.
Business confidence declined slightly in August, but the degree of optimism remained strong. Businesses linked the positive sentiment with hopes for a rebound in customer demand and an economic recovery.
The improvement in business confidence is reflected in Rosstat’s results, which also saw business confidence rebound to -4.7 from a nadir of -9.0 in May. While the Rosstat Business Confidence Index remains well below the -2 it typically registers in the summer months, it remains depressed. And that doesn’t compare to Rosstat’s consumer confidence, which has slumped to -30, although this indicator is only updated quarterly.
Inflation remains subdued due to the collapse in demand, but manufacturing companies saw a faster rise in input costs in August. Higher operating expenses were commonly related to higher supplier costs and unfavorable exchange rates, which pushed up the price of imported goods. The inflation rate was the fastest in four months and strong overall.
The Central Bank of Russia (CBR) reports that consumer price inflation (CPI) was 3.4% in July, still well below the central bank’s target rate of 4%, but economists predict inflation it will increase in the third quarter to between 4%. 5% as the economy recovers and the recent weakness of the ruble affects prices. The CBR has also been aggressively cutting rates to stimulate the economy, which is also putting upward pressure on prices. However, the producer price inflation index (PPI) remains depressed thanks to the economic slowdown.
“Companies were able to increase their sales prices at a faster rate in the middle of the third quarter. The rate of increase was only modest, but the fastest in three months, ”reports Markit. “Input purchases increased fractionally and for the first time since August 2019 amid a rebound in new order entries. Meanwhile, a sharp drop in pre-production inventories was related to higher production requirements as companies used stocks to fulfill orders. “
Siân Jones, an economist at IHS Markit, which compiles the Russian Manufacturing PMI survey, commented: “Russian manufacturers saw the first improvement in operating conditions since April 2019 in August, amid a rebound in production and new orders. The resumption of business at the companies and their clients helped boost production as domestic demand strengthened. Conversely, foreign clients remained undecided as the pandemic continued and global demand declined, and sales exports were further reduced in August “.
“Although producers of goods noted that more layoffs have driven employment decline, the decline was the slowest in five months as production expectations remained strong. Our current forecast points to a 6.5% decline in industrial production in the year, and production is expected to increase 2.9% in 2021. This suggests that any recovery in the manufacturing sector could be prolonged as demand struggles to gain momentum, ”added Jones.
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