Russia’s manufacturing recovery gathers some momentum with strong PMI result in November

Russia’s manufacturing recovery gathers some momentum with strong PMI result in November
Russia's manufacturing PMI expands again to 52.6 in November for second month in a row
By bne IntelliNews December 3, 2018

The recovery of Russia’s manufacturing sector, until now the weakest part of the economy, showed signs of building up some momentum in November as the IHS Markit manufacturing PMI index put in its second strong showing in a row. The index rose to 52.6 from 51.30 a month earlier, well above the 50 no-change mark, Markit said in a press release on December 2.

“The latest index figure signalled the second successive improvement in the health of the sector and the strongest overall upturn in nearly a year-and-a-half,” Markit said.

Russia’s manufacturing sector has been struggling all year and the manufacturing PMI has been below the 50 mark since April. In the first quarter it managed to show growth, according to Markit’s panellists, but only just. The service sector (and also the composite index) have been doing much better and returning strong results all year, partly based on Russia’s booming tech sector and expanding e-commerce.

The improvement in the manufacturing PMI is mirrored in the recent industrial production numbers, which have also improved in the last months. Industrial production expanded by 3.7% in October, the last data available, up from 2.1 in September. Industrial production has been stronger in the second quarter with results over 2%, up from results around 1% in the first quarter.

The improvement in manufacturing and industry has been supported by both the higher than expected price of oil and also slowly recovering real incomes. However, oil prices have taken a hit in the last month, falling to around $50 in November from over $80 a month before. Incomes have also failed to grow very fast. The November results may be the last strong results of this year, as the fall in oil prices could take the wind out of the economy’s sails in December.

“November survey data indicated the most marked improvement in the health of the Russian manufacturing sector since July 2017. The overall expansion was driven by faster upturns in output and new business, and the strongest increase in employment since January 2017. Foreign client demand also picked up, with new export orders rising solidly,” said Markit.

Firms registered a robust degree of confidence in future output, reported Markit. Although price pressures remained marked, the rate of input cost inflation was well below those seen in the middle of the year, with some firms partly passing on higher costs to clients.

Russian manufacturers reported a faster rise in output during November, with the rate of expansion reaching a ten-month high. Anecdotal evidence suggested the latest upturn was driven by greater new order book volumes and stronger client demand, Markit reported. Some firms also stated that production increased due to greater efforts to clear backlogs.

“New orders received by Russian goods producers increased solidly in November. The rate of growth quickened to the fastest since January, and the rise was attributed to new client acquisitions and new product launches. The improvement in demand was broad-based, with new export orders increasing at the fastest rate for seven months,” Markit said.

Reflecting a stronger rise in new business, manufacturing firms increased workforce numbers at the quickest rate since January 2017. The solid rise was linked to greater production requirements. That said, pressure on capacity softened further in November, with backlogs of work contracting for the fifteenth successive month.

“Meanwhile, rates of both input price and output charge inflation accelerated in November. Greater cost burdens were attributed to higher imported input prices, stemming from the strength of the US dollar, and increased fuel costs,” said Markit. “Some firms were reportedly able to partly pass on costs to clients through greater factory gate prices. The rate of charge inflation was strong overall.”

Finally, business confidence increased in November, according to Markit’s panelists, with manufacturers noting the second-strongest degree of optimism since May 2013. Positive sentiment was linked to new product launches and expansion into new markets.

Siân Jones, economist at IHS Markit, which compiles the Russia Manufacturing PMI survey, commented: "The Russian manufacturing sector continued to show strength in November, with growth in output and new orders accelerating to ten-month highs. The upturn in new business from abroad also gained momentum. Reassuringly, firms were upbeat towards future output and as such continued to increase workforce numbers. Job creation was the fastest since early 2017. Although well down on the rates seen earlier in the year, higher fuel and raw material prices led to a faster rise in input costs. That said, greater foreign and domestic demand encouraged manufacturers to increase factory gate charges at a strong pace."