COVID-19 impact leads to unprecedented declines in Russia’s manufacturing PMI

COVID-19 impact leads to unprecedented declines in Russia’s manufacturing PMI
Russia's manufacturing PMI collapsed in April to 31.1 from 47.5 in March as Russia Inc was put on lockdown in April. / bne IntelliNews
By Ben Aris in Berlin April 30, 2020

No surprise here. The coronavirus (COVID-19) epidemic in Russia caused an unprecedented collapse of the IHS Markit Russia Manufacturing Purchasing Index (PMI) in March.

The headline seasonally adjusted manufacturing PMI posted 31.3 in April, crashing from the 47.5 it posted in March as the full weight of the double blows of an oil price collapse and the virus-related stop-shock struck home.

The result is almost as bad as the collapse of China’s manufacturing PMI to 26.5 in February from 51.8 in January during the worst part of its own outbreak – the worst result ever and the first time ever China scored less than the 50 no-change mark in the last 15 years.

China’s PMI index bounced back from its February crash, but it is not clear if Russia will do the same as the number of infections is rising unabated at the moment. The collapse of Russia’s manufacturing PMI shows the worst deterioration in operating conditions across the Russian manufacturing sector since Markit began collecting data in September 1997.

Emergency public health measures to halt the spread of the coronavirus were imposed on March 30 when Moscow was put on lockdown and were then rapidly rolled out in another 53 of Russia’s 86 regions. That led to factory closures and a marked reduction in client demand.

“Although firms remained optimistic of an increase in output over the coming year, expectations dropped to a series low (since April 2012) and workforce numbers were reduced steeply,” Markit said in a press release.

Despite the reduced demand, inflationary pressures were up, caused by the supplier shortages as supply chains have also broken down. The devaluation of the ruble by some 15% this year has put upward pressure on prices as crucial imports have become significantly more expensive. As bne IntelliNews reported in its Russia monthly country report, machinery and equipment made up 30.2% of Russia’s imports by value in February.

“A depreciation of the ruble pushed imported input prices higher in April,” Markit said. “Unfavourable exchange rates were partially behind the sharp increase in cost burdens during the month, with the pace of inflation accelerating to the fastest since the hike in VAT in January 2019. Nonetheless, firms passed part of the rise in input prices to their clients through a strong increase in output charges.”

As the economy came to a standstill new orders fell at an unprecedented pace at the start of the second quarter.  Concurrently Russia was hit by the stop-shock across Europe and new export orders contracted at a record rate, reports Markit, with a number of firms stating that clients had cancelled or postponed orders since emergency public health measures were put in place.

The outlook of managers for the rest of the year considerably blackened in April, a finding that has been bourne out by the sudden drop in Rosstat’s monthly business confidence survey, which dropped from the usual -2 from this season to -7 in April, almost its lowest level in the last three years.

“Although still expecting a rise in production, firms were their least confident since the series began in April 2012. Key concerns for companies were the length of lockdowns and how quickly the economy will recover once emergency measures are lifted,” Markit reports.

Unemployment is expected to rise from the current post-Soviet lows of around 4.7% in March to anything between 7% and 10%, according to various estimates – what will actually happen all depends on the strength of the expected rebound and the duration of the stop-shock. Still, as reports come in of widespread wage reductions, mandatory holidays and sackings, clearly the effect on the labour markets is going to be significant.

“In line with a marked drop in client demand, firms cut their workforce numbers at the quickest rate since January 2009, reports Markit. “The decrease in employment was a stark turnaround from the broadly unchanged levels seen in March.”

The halt in production meant that factories rapidly began to clear the backlog of orders still on their books. Backlogs of work fell at the strongest pace since December 2008, thereby expanding spare capacity further, according to Markit.

Vendor performance was also hit by the double whammy of rapidly falling demand coupled with longer lead times, leading to the greatest deterioration in sales seen since data collection began in September 1997, as the supply and distribution chains buckled. Longer lead times stemmed from logistical issues following the outbreak of COVID-19 and supplier shortages.

Siân Jones, economist at IHS Markit, which compiles the Russia Manufacturing PMI survey, commented: "Already-difficult demand conditions across the Russia manufacturing sector were further exacerbated by factory closures and lockdowns following the escalation of the outbreak of COVID-19. Output and new orders contracted at unprecedented rates as domestic and foreign client demand slumped.

"Of concern was a sharp uptick in input prices, with the rate of inflation at the fastest since the hike in VAT in early-2019. A depreciation of the ruble and supplier shortages drove costs higher, with some firms still partly able to pass costs on to clients,” Jones added. "We expect industrial production in Russia to decline 3.8% in 2020, as the impact of the COVID-19 outbreak takes hold. Manufacturers remained optimistic of a rise in output in the coming year, but confidence was knocked such that it dropped to a series low."

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