Russia’s manufacturing sector gained a little momentum over the summer as the IHS Markit Russia Manufacturing Purchasing Managers (PMI) went back into the black printing a gain of 51.3 in October, up from September’s 50 that represents no change month-on-month.
Russia economy returned to growth this year, but the expansion has been anaemic and industry has struggled to gain any momentum.
Russia’s industrial production results that run in parallel to the manufacturing PMI have also been disappointing. Russia's industrial output growth continued to slow in September 2018, down to 2.1% year-on-year from 2.7% seen in August and 3.9% in July, the latest data from Rosstat statistics agency released on October 16 shows. The industrial growth for 3Q18 slowed to 2.9% y/y from 3.2% in 2Q18, amounting to 3% y/y in January-September 2018.
Likewise, the manufacturing PMI has been bouncing about around the 50 no-change mark. The index was just over 50 for the first three months of this year, but dipped below the no-change market between May and August, and was flat in September.
At the same time the Markit composite index that includes services has done better, held up by the strong growth in the services sector that is in part driven by the rapidly expanding e-commerce sector. The PMI composite index was 52.1 in September and has been running at between 51 and 55 all year.
Drilling into the details of the manufacturing index Markit noted that October’s result was the first monthly improvement in operating conditions since April.
“Overall performance across the goods-producing sector was supported by solid and faster expansions in output and new orders, with foreign demand also increasing. Encouragingly, employment growth accelerated to the quickest since January 2017 as pressure on capacity became more apparent. In line with firmer client demand, firms expressed a robust degree of optimism towards future output,” Markit said in its press release.
Key to the manufacturing sector regaining growth momentum was a faster increase in output in October. The solid expansion was the strongest in six months and largely attributed to a sustained upturn in new business and greater client demand.
Growth in new business received by goods producers accelerated to the fastest rate since January amid reports of new client acquisitions and new product launches. The moderate expansion in new orders was supported by foreign client demand, with new export orders increasing solidly, Markit reported.
Greater production requirements also drove a first monthly rise in input buying since April. Moreover, the increase in purchasing activity was the fastest in over a year.
“Nevertheless, pre-production inventories continued to contract strongly in October as firms reportedly used current stocks in production,” Markit reports.
With the tide lifting all the boats, business confidence remained strongly optimistic in October, according to Markit’s panelists, with manufacturing firms signalling the second highest degree of confidence since May 2015. A number of survey respondents suggested new product development helped drive output expectations.
That result does not tally with Rosstat’s business confidence survey that saw confidence fall heavily in September to -5 from -3 in August and -2 where it has been for the previous five months.
Likewise, consumer confidence has been sinking, with Rosstat’s consumer confidence index tumbling to -14 from -8 the previous two months. Consumer demand remains soggy as despite growing nominal and real wages, price increases have eaten up a lot of the gains and the all important real disposable income (the money that is left after food and utility payments) went positive at the start of the year but since then has fallen back to close to zero as of August.
Another factor holding back industrial expansion is the high cost of borrowing. The Central Bank of Russia (CBR) ended its loosening cycle in September with a surprise 25bp rate hike that front loaded monetary policy in the face of fears of new “crushing” sanctions that may be imposed by the US this autumn.
Faced with a lot of uncertainty over the rest of the year, the government is running an extremely conservative policy at the moment. Another way the state could boost growth is to ease the terms of the so-called budget rule that sends any excess oil tax revenues over $40 to the national welfare fund. Former finance minister and co-head of the presidential council Alexei Kudrin has called for the rule to be relaxed and the bar raised to $45 on the back of the current $75 price for a barrel of oil, however, the liberals in charge of policy have so far refused, preferring to prepare for a possible crisis rather than chase growth.
In this context the pick up in the PMI manufacturing index was welcome news.
Sian Jones, economist at IHS Markit, which compiles the Russia Manufacturing PMI survey, commented: "October saw the first improvement in Russian manufacturing operating conditions since April. More robust domestic and foreign demand supported growth momentum, while employment growth accelerated to the fastest since January 2017. Cost pressures softened slightly, as input price inflation dipped to a seven-month low. Although firms reported partly passing on higher input prices to clients, charge inflation also eased to the least marked since March. A stronger overall manufacturing performance also drove confidence in future output, which was the second-highest since May 2015, behind September's recent peak."