Russia’s manufacturing PMI grew to a three-month high after a less than inspiring performance in February and March. The IHS Markit Russia Manufacturing Purchasing Managers’ Index increased to 51.3 in April up from 50.6 in March. The no-change mark is denoted by 50 in the index.

While the services PMI has been doing very well this year at 53.7, services has slowed somewhat since the beginning of the year’s 55.1. That has pulled down the overall composite index, though it was still at a respectable 53.2 in March and will probably improve in April on the back of the manufacturing gains in the latest monthly result.

In general while services have recovered earlier and grown more strongly in 2017 and the first quarter of this year – partly driven by booming e-commerce – manufacturing growth has been fragile, fickle and vulnerable to external shocks such as the wild swings in the ruble exchange rate.

The outlook for the rest of the year remains for more of the same, but as spring arrives things have improved. The April survey data signalled a moderate, but faster, expansion across the Russian manufacturing sector, Markit reported.

“Overall growth was supported by quicker upturns in output and new orders, with the former reaching a three-month high. In line with stronger client demand, employment levels rose for the first time so far this year,” Markit said in a press release. “On a less positive note, input price inflation accelerated to the fastest since September 2015 and was marked overall. The rate of charge inflation also quickened in response, and was the strongest in over two-and-a-half years.”

The Central Bank of Russia (CBR) decided to keep rates on hold at its April meeting after the ruble weakened sharply following the introduction of new US sanctions on April 6. Inflation has been at a historic low of 2.2-2.3% in recent months but it is thought to have reached its nadir and the CBR is forecasting it will rise to the regulator’s target of circa 4% by the end of this year, holding back faster growth.

However, demand is clearly rising on the back of rising income and the increasingly propensity of Russian consumers to make “big ticket” purchases; this is most obvious in the car market, where sales have been growing for more than a year. Retail turnover is now positive and was up 2% and 2.2%, in March and April, respectively, and real incomes were up 6.5% and 7.5% in the same period.

“Output levels at Russian goods producers increased further in April, and at the fastest pace since January. Panellists linked the solid rise in production to the acquisition of new clients and greater new order volumes,” Markit said. “That said, the expansion was only marginal overall and one of the weakest in the current 21-month sequence of growth.”

The fall in the ruble is having a positive impact on exports. As bne IntelliNews columnist Chris Weafer argued in an op-ed, the Kremlin has changed its mind about the strength of the ruble and is now supporting a somewhat weaker ruble to boost the manufacturing sector for the meantime. New export orders in April increased strongly, however. Moreover, the upturn was the fastest since March 2008, noted Markit.

Greater client demand also influenced the first rise in employment levels so far this year. The pace of job creation was moderate overall and the fastest since January 2017. Backlogs meanwhile contracted for the eighth successive month, albeit only marginally.

The ruble is expected to strength somewhat as the year wears on and the shock of sanctions fade, and coupled with slowly rising inflation, these factors combined will dampen growth in the second half of this year.

"On the price front, average cost burdens faced by Russian goods producers increased markedly in April. The rate of inflation was the fastest since September 2015. Anecdotal evidence largely attributed the rise to less favourable exchange rates which pushed up the price of imported raw materials. Similarly, average charges rose at a sharp and accelerated rate as firms largely passed on higher costs to clients," Markit observed.

Purchasing activity increased at a rate just below that seen in the previous month. Markit’s panellists said that current stocks were used during production, with pre-production inventories falling solidly in April. Notably, vendor performance improved for the first time since January 2014.

Expectations in the year-ahead outlook for output were robust in April, with the degree of confidence reaching the highest since May 2015. Positive sentiment was largely linked by panellists to new order growth and more favourable economic conditions.

Commenting on the Russia Manufacturing PMI survey data, Sian Jones, an economist at IHS Markit, said: “The latest IHS Markit Russia Manufacturing PMI signalled a modest expansion across the goods producing sector in April. The upturn was supported by solid growth in output and a faster increase in new orders.”

“Meanwhile, greater client demand was reflected in the first rise in employment so far in 2018. Business confidence also reportedly stemmed from an improvement in economic conditions and sustained upturns in output and new orders,” Jones added. “Notably, rates of input price and output charge inflation accelerated to the fastest since September 2015 amid reports of less favourable exchange rates. Average cost burdens rose markedly as prices of imported raw materials were pushed up.”