Slower Rise in Russian Services Activity Offsets Stronger Gain in Manufacturing Output
Russian private sector growth remained lacklustre at the start of the third quarter, according to HSBC PMI® data compiled by Markit.
The rate of growth in services activity eased to the weakest since September 2010, offsetting a stronger increase in manufacturing production.
The HSBC Russia Services Business Activity Index remained above the no-change threshold in July but fell from 53.2 to 52.0, indicating the weakest rate of expansion in 22 months. The Composite Output Index was unchanged from June’s eight-month low of 52.6, as manufacturing output rose at a faster pace (53.6).
New business received by Russian service providers rose only fractionally in July, with the pace of expansion the slowest in the current 23-month sequence. A stronger gain in new orders at goods producers failed to prevent the overall rate of growth across both sectors slipping to a ten-month low.
With new services business barely rising during the month, the volume of incomplete contracts continued to fall. The rate of depletion eased from June’s sharp pace, but remained faster than the long-run survey average. A similar trend was evident for manufacturing backlogs.
The 12-month outlook for services activity deteriorated sharply at the start of the third quarter. Just over one-third of firms expect activity to rise over the next 12 months, compared with 13% that forecast a reduction. The overall degree of positive sentiment weakened sharply as a result, to the worst in 2012 so far and the second-lowest in over three-and-a-half years.
Russian service sector companies took on additional staff in July.
The rate of workforce growth picked up from June’s marginal pace, and was broadly in line with the average for 2012 so far. In contrast, manufacturing employment was unchanged since June.
The overall rate of input price inflation in manufacturing and services strengthened to a six-month high in July, but remained weaker than the long-run survey trend. Anecdotal evidence linked rising cost pressures to energy, fuel, utilities and labour costs.
Services registered a stronger increase in input prices than manufacturing.
Service providers and manufacturers both increased their charges at faster rates during the month. In line with the pattern for input costs, the rate of charge inflation in services was stronger than that posted in manufacturing. In both sectors, however, output price inflation remained relatively weak.
Alexander Morozov, Chief Economist (Russia and CIS) at HSBC, said:
“The Russian economy retained subdued growth in July, HSBC Russia Composite PMI® data showed. Manufacturers managed to stabilize output growth, albeit at a low rate.
“In contrast, service providers still saw weakening growth momentum further to very weak new business flows. Importantly, a growth deceleration trend in services has been in place since 2H 2011 and has not stopped yet. Similar to manufacturing, Russian service providers have also split into two groups: one expanding and one contracting. The existence of the two groups points to increased uncertainty regarding the future economic growth trend.
“We reckon that, growing at about 2.7% in annualized terms at present on our estimates, Russian GDP risks further losing growth momentum in the coming months before it will be able to stabilize at 2.0-2.5%.
“Although inflationary pressures intensified in both manufacturing and services in July, we believe they do not raise much concerns. Slower demand growth should enable producers to pass only some inflationary pressures on customers. So, the key risk to inflation stems from a mounting supply shock in the food sector, rather than the demand side. This type of inflation can hardly be addressed by conventional monetary policy.”