The seasonally adjusted IHS Markit Russia Services Business Activity Index registered 48.8 in October, down from 50.5 in September, to signal the fastest contraction in Russian service sector business activity since December 2020.

The contraction in the services PMI was offset to some extent by a gain in the manufacturing PMI released a few days ago that saw the index rise to 51.6 in October, up from 49.8 in September; the first improvement in the health of the Russian manufacturing sector for five months.

Combined the IHS Markit Russia Composite PMI Output Index almost posted a net gain, but fell just shy of breaking above the 50 no-change mark of 50 to post 49.5 in October, down from 50.5 in September. The combined index puts Russia’s private sector business activity back into overall contraction as the post coronacrisis bounce back comes to an end.

“The fall in output was the second in three months, albeit only fractional overall. A quicker expansion in manufacturing production was outweighed by a renewed contraction in service sector activity,” Markit said.

Services are particularly prone to the impact on restrictions of movement as Russia is in the middle of a no-work week due to the resurgence of the coronavirus (COVID-19) epidemic that has seen death rates spike to over 1,000 a year – the highest level since the pandemic broke out over a year ago. While the no-work week is not a lockdown, the government has advised people to stay at home in an effort to create a firebreak in the spread of the infection. However, the rising infection rates have already had an impact on services activity even before the enforced holiday was announced.

“October’s services PMI data indicated a decrease in business activity across the Russian service sector, the second decline in output in three months. The renewed fall in activity stemmed from weak client demand and a return to contraction in new business,” Markit said.

Subdued demand conditions led to a further decline in backlogs of work, while reduced pressure on capacity resulted in a renewed fall in employment. At the same time, rates of input price and output charge inflation accelerated as greater supplier and utility costs were partially passed through to clients, according to Markit’s panellists.

“Concurrently, business confidence moderated from September's 28-month high and dropped below the long-run series average amid concerns regarding the longevity of ongoing COVID-19 restrictions and rising cases,” Markit said.

Subdued client demand reportedly drove the decline, as firms also mentioned the negative impact of the pandemic on activity. The rate of decrease in output was only marginal, however.

Contributing to the decline in activity was a renewed fall in new orders at the start of the fourth quarter. The decrease was the first in 2021 so far and attributed by surveyed businesses to weaker client demand.

In contrast, new export orders returned to expansion during October. Service sector firms registered only a modest rise in foreign client demand, but one that was the strongest for four months.

Inflation remains the main economic headache with a series of aggressive hikes by the Central Bank of Russia (CBR) failing to curb rising prices that are driven by a poor harvest and disrupted supply chains.

Input costs rose markedly in October and the latest data shows an accelerated increase in input prices, as companies noted that greater supplier and utility surcharges that pushed overall cost burdens up. The rate of inflation was the fastest since May and was above the series trend.

Despite weak demand conditions, service providers were still able to partially pass on higher costs to customers at the start of the fourth quarter. The rate of output charge inflation was sharp overall and the quickest for four months.

At the same time, service providers registered a renewed decrease in employment. The fall in workforce numbers was the second in three months but only marginal overall. Unemployment has largely recovered from the worst of last year’s epidemic when the unemployment rate spiked to 6.8% but in August fell back to its historical low of 4.3%. However, the October PMI results suggest that unemployment may rise again mildly in the short-term.

Where firms recorded a decline in staffing numbers, this was linked to efforts to cut costs and an associated increase in redundancies.

“Job shedding did not translate into greater pressure on capacity, however, as backlogs of work fell at a quicker pace in October. The decline in outstanding business was attributed to weaker demand conditions and a decrease in new order inflows,” Markit said. “Russian service providers remained broadly optimistic of an increase in output over the coming year. That said, the degree of confidence softened amid concerns regarding the pandemic and future demand.”

A resurgence in COVID-19 cases dampened service sector business confidence, while manufacturers noted slightly stronger output expectations for the year ahead.