Russia’s seasonally adjusted IHS Markit Russia Services Business Activity Index went into the red in August, falling below the 50 no-change mark to 49.3, down heavily from 53.5 in July as the low base effects wear off, Markit reported on September 3.

Russia’s economy is slowing on paper, but the statistics are confusing following the big swings during the last year and half due to the pandemic. However, the forward-looking PMI that is based on panel interviews with business leaders shows clearly that the economic bounce-back effect is coming to an end and growth is cooling as the autumn arrives.  

Russia’s economy boomed as the coronacrisis started come to an end in the last quarter of 2020 – a process that is not over. What is happening now is a mild correction from a bounce-back overshoot as a new economic balance is established and growth settles back into its long-term projection groove.  

The seasonally manufacturing PMI index also posted a fall in August to 46.5, down from 47.5 in July, the third successive monthly deterioration in operating conditions across the Russian manufacturing sector.  

Taken together, the composite PMI output index was also dragged down to below the no-change mark and posted 48.2 in August, down from 51.7 in July, to signal the first decline in Russian private sector business activity in 2021 so far. The fall in output was broad-based by sector.

The fall in the services PMI is especially telling, as services were in the front line when the pandemic hit and the PMI collapsed to an unprecedented record low in the 30s last spring. However, as the lockdown restrictions were removed at the end of summer it bounced back strongly and has kept the PMI index buoyant since.

“The latest data signalled the first decline in Russian service sector output since December 2020, albeit only marginal overall. Where a decrease in business activity was reported, firms linked this to softer demand conditions and a further slowdown in new order growth,” Markit said in a press release.  

Some firms reported softer demand conditions as the economic rebalancing post-shock establishes itself. The PMI results tally with the universal projections by economists that growth will slow in the second half of  this year after 10.3% GDP growth year on year in the second quarter – a new all-time record, beating the previous 10% gain in 1999 after the 1998 financial crisis.  

However, the Central Bank of Russia (CBR) remains bullish on economic growth, predicting 4-4.5% in 2021, 2-3% in 2022 and 2023, and has just issued its forecast for 2024 of 2-3%. The official CBR macroeconomic forecasts are here. 

The CBR also predicts annual inflation at 5.7-6.2% in 2021, 4-4.5% in 2022, 4% in 2023. The price of Urals oil is projected at $65 per barrel in 2021, $60 in 2022, and $55 in 2023.

The decline in services was the first in 2021 to date as new order growth eased to only a fractional pace, Markit reports.  

“Foreign client demand was a source of strength, however, as new export business rebounded back to growth. That said, less robust demand conditions domestically weighed on companies' decisions to hire additional staff as employment fell. The decrease coincided with a sharp depletion in backlogs of work, which signalled little pressure on capacity. At the same time, business confidence dropped to a nine-month low amid concerns regarding inflation and future demand,” Markit reports.  

Unemployment has fallen steadily since surging in the second half of last year from historical post-Soviet lows to reach a peak of 6.4% of the population in August a year ago. Unemployment was 4.8% in June, the last data available, and while it may tick up in the coming months, it is not expected to surge.  

Firms were hesitant to expand their workforce numbers, as employment in services fell for the first time since January, reports Markit. Although only marginal, the reduction in workforce numbers marked a turnaround from the strong expansion seen in the second quarter.

The fly in the ointment for Russia’s economic recovery has been a surge in inflation which the CBR is struggling to contain and which has unsettled the population, who are very sensitive to price rises. The economic dislocation due to the pandemic – especially the disruption to supply chains – and surging food prices, which make up half of the average shopping basket, have caused the population’s inflation expectations to become unanchored and triple those of the CBR.  

Markit reports that inflationary pressures eased in August as a result of the slower rises in input prices and output charges, but the rate of increase remained historically elevated, nonetheless. The rate of cost inflation eased to a seven-month low but remained above its historical average. The marked rise was often attributed to supplier price hikes and greater utility costs.

In the same vein, the pace of increase in selling prices softened during August. The rate of charge inflation was sharp overall and faster than the series trend, despite easing to a six-month low. Panellists commonly mentioned that increases in output prices were due to efforts to pass on higher costs to clients where possible.

The rate of expansion of new business eased for the third month running from May's recent high and was the slowest in the current eight-month sequence of growth, reports Markit. Although firms continued to note client interest, overall customer demand showed almost no improvement from the month before.

At the same time, new export orders posted a renewed expansion in August. Although rising at only a marginal rate, the increase in foreign client demand was the fifth in six months.

Finally, business expectations at service providers worsened during August. Although still broadly upbeat regarding the outlook for output, inflation and demand concerns led to the weakest degree of confidence since November 2020.