Russia’s manufacturing PMI back in the black, rising to 51.1 in August

Russia’s manufacturing PMI back in the black, rising to 51.1 in August
Russia’s manufacturing PMI back in the black, rising to 51.1 in August, the last of the three PMI indicators to fully recover from the covid-induced crash in 2Q20 / bne IntelliNews
By bne IntelliNews September 1, 2020

Russia’s manufacturing PMI was back in the black, rising to 51.1 in August from the mild contraction of 48.4 in July and completing the recovery from the index’s total collapse in the second quarter due to the coronacrisis.

The manufacturing index crashed to an all-time low of 31.1 in April as the impact of the lockdown of the Russian economy due to the epidemic took hold, according to IHS Markit, which produces the index.

The return to manufacturing expansion – a result above the 50 no-change mark represents growth – is the first gain in over a year and the last of the three indicators to return to the black. Russia’s services PMI bounced back to 58.5 in July, which pulled up the composite index to 56.8 in the same month, despite the mild contraction in manufacturing.

The recovery in the manufacturing PMI is not yet reflected in the industrial production index, which was down by 8% in July, but here too the rate of contraction is slowing from -9.4% in June and -9.6% in May. Bank of Finland Institute for Economies in Transition (BOFIT) reports that in some sectors – most notably agriculture – production has already recovered and is now above its pre-crisis norms; however, retail sales have fallen in all of Russia’s regions except Chukotka.

Manufacturing growth expansion was the first since April 2019 amid a faster upturn in output and a renewed rise in new orders, reports Markit. As a result, employment fell at its slowest pace for a year, as the rate of contraction in backlogs of work also softened. Firms remained optimistic in August, despite the degree of confidence moderating slightly.

Meanwhile, higher supplier prices pushed input costs up midway through the third quarter, with firms only able to partially pass greater cost burdens on to clients through higher charges.

“The upturn was solid overall and the sharpest since March 2019. Some companies stated that an uptick in customer demand had driven the rise in output,” Markit said. “Anecdotal evidence attributed sales growth to new client acquisitions and greater customer demand. Although only slight, the expansion in new business was the fastest since April 2019. Meanwhile, new export orders fell only marginally, and at the slowest pace since May 2019. Panellists continued to state that foreign client demand was historically weak.”

The slowdown has hit employment, with Russia’s unemployment rate rising some 2pp in recent months to 6.3% in July – its highest level in almost a decade. Unemployment was last over 6% in 2011.

The workforce numbers were reduced further in August, albeit at the slowest pace since March 2020, says Markit. Companies continued to report an increase in redundancies amid challenging demand conditions. At the same time, backlogs of work also contracted at a softer pace.

Business confidence dipped slightly in August, but the degree of optimism remained solid. Firms linked positive sentiment to hopes of an uptick in client demand and an economic recovery.

The improving business confidence is mirrored in the Rosstat results, which also recorded a recovery in business confidence to -4.7 from a nadir of -9.0 in May. While the Rosstat business confidence index is still running well below the -2 it usually registers in the summer months, it remains depressed. And that does not compare with Rosstat’s consumer confidence, which has collapsed to -30, although this indicator is only updated quarterly.

 

Inflation remains subdued due to the collapse in demand but manufacturing firms registered a faster rise in input costs in August. Higher operating expenses were commonly linked to greater supplier costs and unfavourable exchange rates, which pushed imported goods price up. The rate of inflation was the fastest for four months and strong overall.

The Central Bank of Russia (CBR) reports that consumer price inflation (CPI) was 3.4% in July, still well below the central bank’s target rate of 4%, but economists are predicting inflation will rise in the third quarter to between 4%-5% as the economy recovers and recent weakness in the ruble feeds through to prices. The CBR has also been aggressively cutting rates to stimulate the economy, which also exerts upward pressure on prices. However, the producer price index of inflation (PPI) remains depressed thanks to the economic slowdown.

“Companies were able to raise their selling prices at a quicker rate midway through the third quarter. The rate of increase was only modest, but the fastest for three months,” reports Markit. “Input buying rose fractionally and for the first time since August 2019 amid a pick-up in new order inflows. A marked fall in pre-production inventories was meanwhile linked to greater production requirements as firms used stocks to fulfil orders.”

Siân Jones, economist at IHS Markit, which compiles the Russia Manufacturing PMI survey, commented: "Russian manufacturers saw the first improvement in operating conditions since April 2019 in August, amid an uptick in production and new orders. The resumption of business at firms and their clients helped boost output as domestic demand strengthened. By contrast, foreign clients remained hesitant as the pandemic continued and global demand was subdued, with export sales shrinking further in August.”

"Although goods producers cited further redundancies as having driven the fall in employment, the decrease was the slowest in five months, as output expectations stayed solid. Our current forecast points to a 6.5% decline in industrial production on the year, with output expected to rise 2.9% in 2021. This suggests that any recovery in the manufacturing sector could be drawn out as demand struggles to gain momentum,” Jones added.

Data

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