Russia’s economy slowed somewhat as the holiday season started, with the IHS Markit Russia manufacturing and services indices slowing in December from previously strong results in November, but remaining above the 50 no-change mark, which means the economy continued to expand.

The seasonally adjusted IHS Markit Russia Manufacturing Purchasing Managers’ Index – a composite single figure snapshot of the performance of the manufacturing economy – registered 51.7 in December, down from 52.6 in November.

This indicator has been closely watched as while services grew strongly in 2018, partly driven by the booming e-commerce sector, manufacturing did less well.

Industrial production picked up in 2018 but this sector has been unable to gather any momentum. Industrial production fell from a strong 3.7 in October to 2.4 in November, the latest data available.

The forward looking Markit manufacturing PMI also suggests a cooling of manufacturing at the end of 2018 but nevertheless the latest headline figure was the third highest in 2018 and brought to a close the strongest quarterly expansion since the third quarter of 2017.

Services continue to do better, but here too there was a cooling off as the year ended.

The IHS Markit Russia Services Business Activity Index – a single-figure measure designed to track changes in total Russian services activity – posted 54.4 in December, down from 55.6 in November but nonetheless indicating a solid expansion in business activity across the Russian service sector.

The increase in output was attributed to greater new order inflows from both domestic and foreign clients. The final quarterly average for 2018 was the strongest in a year, despite the latest data signalling the slowest rise in business activity in four months, according to Markit.

The slowdown in both services and manufacturing brought down the composite output index, a weighted average of the Russia Manufacturing Output Index and the Russia Services Business Activity Index. The composite index posted 53.9 in December, down from 55.0 in November.

All in all, Markit said that the December result was a good one and that the last quarter of 2018 was the strongest in the year for the Russian economy.

“Growth was supported by solid upturns in production and new business. Panellists registered a further reduction in backlogs, partly due to a moderate increase in employment. Meanwhile, inflationary pressures softened. The rate of output charge inflation eased to a nine-month low, with panellists suggesting greater competition was slowing rises in output prices. Reassuringly, business confidence strengthened and was the second highest since May 2013,” Markit said in a press release.

Output across the Russian goods producing sector increased at a solid rate in December, albeit slightly weaker than November. Where a rise was reported, panellists linked this to greater new order volumes. New business continued to expand at a solid pace in December and at the second fastest rate since January. Anecdotal evidence stated that greater client demand and the acquisition of new customers drove the latest upturn.

“Moreover, new business from abroad increased for the fifth month running and at a rate above the series trend. Some firms suggested that the rise in new export orders was due to greater access to new markets,” Markit said.

On the price front, manufacturing firms registered a softer rise in input prices. The rate of cost inflation was marked overall but dipped to a nine-month low. Nonetheless, panellists attributed the increase in cost burdens to higher raw material prices and greater transportation costs.

"Encouragingly, business confidence picked up further in December. Robust optimism stemmed from greater access to new foreign markets and a sustained rise in new business, which manufacturers expect to see continuing through 2019,” said Siân Jones, economist at IHS Markit, which compiles the Russia Manufacturing PMI survey.

Services were also driven by new orders from abroad and the sector expanded more robustly than manufacturers.

“In line with a sustained rise in new business, Russian service providers noted a stronger increase in workforce numbers in December. The rate of job creation picked up to an eight month high amid greater business requirements,” Markit said.

Input price inflation eased for the second month running in December. Nevertheless, Russian service providers continued to register a marked rise in cost burdens overall. Where operating expenses rose, panellists attributed this to higher wage and energy costs.

“Finally, business confidence across the Russian service sector improved in December. Expectations of further rises in new business and a sustained increase in output reportedly drove higher positive sentiment. The degree of optimism was the second-strongest since February and robust in the context of the series history,” Jones added.

"Although IHS Markit's current forecasts show GDP growth moderating slightly in 2019, the latest new business expansion remained sharp. Survey respondents also noted the fastest rise in new export orders since data collection began in September 2014, signalling robust international client demand,” Jones said. “Inflationary pressures cooled, with rates of both input price and output charge inflation softening in December amid greater competition. At the composite level, both manufacturers and service providers registered a solid increase in output in December. Employment continued to rise as the level of positive sentiment towards the year ahead rose to one of the strongest since 2012."