bne IntelliNews – Russian Services PMI Returns to Growth as Business Confidence Rebounds from March War Shock

Russia saw a return to growth in its services sector in June, according to the latest data from the S&P Global Service Manager’s Index (PMI), recording 51.7 in June, down from 48.5 in May (chart), to mark the first expansion of business activity in Russia’s services sector in four months.

The rate of growth was only marginal overall and below the series average, but the recovery was believed to have been tied to increased customer demand and a further increase in new business, S&P reports.

Production rose slightly as new orders rose for the first time in nine months and at the fastest pace in a year, according to S&P. Customer demand was supported by domestic customers as new export orders continued to contract.

At the same time, production expectations for the outlook for the year ahead have strengthened to their highest level since February. Firms continued to downsize, albeit at a slower pace, amid further reductions in backlogs.

The result of services is based on a slight growth in the Manufacturing PMI up slightly in Juneposting 50.9, in line with 50.8 recorded in May.

The combined results show that the Russian economy is stabilizing after the initial shock of Western sanctions related to the war in Ukraine begins to wear off. RosStat published slightly positive economic growth figures at the end of June, which paint a mixed picture. There has been strong growth in things like raw material extraction, but other sectors like automotive have collapsed due to lack of imported inputs.

Overall, May’s RosStat results were good enough for Capital Economics to re-evaluate its forecast for a first-quarter economic contraction from -15% to -10%. The torrent of incoming petrodollars is proving to be a cushion against a worse fall in production due to the extreme sanctions imposed by the West.

Overall, the S&P Global Composite PMI Output Index was also pushed back into the black, posting 50.4 in June from a contraction of 48.2 in May.

The latest reading of the index signaled a further rise in private sector output after three months of decline, driven by a marginal recovery in service sector business activity. Manufacturers, however, recorded a faster decline in production.

However, several problems remain. Inflation remains very high, despite the fact that the Central Bank of Russia (CBR) believes that inflationary pressures are beginning to ease.

Russian service companies said input costs continued to rise in June due to rising prices for imported inputs and an extremely strong ruble that hovers around 50 rubles to the dollar – its strongest since 2015.

Some companies also said increases in labor costs to retain employees drove up spending. Although among the highest on record, the cost inflation rate hit its lowest level since February, according to S&P. As a result, companies passed on increased costs to customers. The rate of fee inflation eased considerably from May and was the lowest since February 2021, in line with CBR’s estimate that inflationary pressures are easing.

The CBR imposed an emergency hike to 20% of the prime rate in the days following the start of the war in Ukraine in late February. However, his swift action quickly stabilized the situation and the regulator has cut rates four times since returning the prime rate to the pre-war level of 9.5% on June 10. More rate cuts are expected and the CBR says it will return to its 4% target level for inflation in 2024.

If they are visible for ordinary mortals, mainly through the increase in the cost of living, the sanctions do not yet severely affect the daily life of the majority of the population, which maintains demand. Labor is a bright spot where unemployment levels hit a new post-Soviet low of 3.9% in May, according to RosStat.

While many economists expect the situation to deteriorate as the long-term negative effects of the sanctions begin to be felt, the PMI indices paint a picture of relative calm for now.

“The June data indicated the first increase in new orders from Russian service providers since September 2021. Companies often attributed the recovery to demand from new and existing domestic customers. New business growth was strong overall and broadly in line with the series trend, although it started from a low base after a prolonged downturn,” S&P said in a note.

One of the areas where the sanctions have made the most difference is in exports, which have collapsed. New export orders fell again at the end of the second quarter, although at a slightly slower pace, according to S&P. “The rate of contraction was steep overall and among the largest on record, as companies said the drop in new business from overseas reflected the impact of sanctions on demand from overseas customers.” , reports S&P.

Cocooned in a world dominated by state propaganda and impressed by the rapid recovery of the value of the ruble against the dollar, after the currency’s massive weakening in the first week of the war, the Russians support the war of Putin and are optimistic about the prospects.

“Confidence in the outlook for production for the year ahead rose to its highest level since February and marked a marked reversal from the pessimism seen in March and April. customer demand supported positive sentiment, according to panelists,” reports S&P.

Nevertheless, companies continued to reduce their workforce slightly at the end of the second quarter due to voluntary departures and difficulties in retaining staff in a tight labor market.

Still, service providers say they have enough capacity to handle new incoming cases as backlogs were exhausted again in June. The rate of contraction eased significantly amid higher new orders, however, at the slowest of the current 17-month decline streak.

Customer demand strengthened across the Russian private sector in June. Manufacturers and service providers saw an increase in new orders, with total new sales increasing at the fastest pace since May 2021. That said, the rise in demand is driven exclusively by the domestic market, with new orders in the exports have further decreased.