Russia's manufacturing sector contracted in September, marking the first decline in 28 months, as weak demand, supply chain disruptions and material shortages hampered production. (chart)

According to the latest Purchasing Managers' Index (PMI) data from S&P Global, the sector posted 49.5, down from 52.1 in August, signalling a fractional, yet notable deterioration in the industry's performance as it drops below the 50 no-change benchmark for the first time since April 2022 just after the war in Ukraine started. 

The contraction, though slight, was driven by renewed declines in output, new orders and employment. "Subdued demand conditions and supplier delivery delays led to input shortages and hampered output," the report noted, adding that the drop in production was the first since July 2022.

The slowdown comes as, after two years of unexpectedly strong growth, Russia’s economy is cooling as the factors driving a military Keynesianism bump start to wear off. The Central Bank of Russia (CBR) issued a pessimistic medium-term macroeconomic outlook at the start of August that predicts economic growth could stall in 2025 after it teamed up with the government to use non-monetary policy methods to cool an overheated economy and bring down persistently high inflation. 

The decline in new orders, ending a 27-month growth streak, contributed significantly to the downturn. Panellists attributed the fall to muted domestic demand. In contrast, export orders showed resilience, with new export demand, particularly from Central Asia, rising at its fastest pace since August, said S&P Global’s panellists. 

Supply chain issues worsened, as delivery delays, particularly in rail and international logistics, lengthened lead times to their second-worst level since July 2022. These disruptions further exacerbated input shortages, driving up production costs.

"Russian goods producers reported a faster rise in input costs during September amid raw material shortages and greater transportation fees," the report stated. Inflation was running at over 9% during the summer, but appears to have passed its peak as the combination of very high prime interest rates (19%) and non-monetary measures start to kick in. 

Firms responded by passing higher costs to customers, resulting in the sharpest rise in output prices in nearly a year. Inflationary pressures were notably high, driven by supplier price increases and elevated transportation costs.

The manufacturing sector also saw a contraction in employment, with firms reducing their workforce at the quickest pace since October 2022. "A fall in production requirements and difficulties finding skilled candidates for vacancies contributed to job shedding," the survey found.

Despite the contraction, backlogs of work continued to decline, with firms effectively processing delayed orders. Inventories of finished goods rose at their fastest rate since June, as new orders came in lower than expected.

Looking ahead, businesses remain cautiously optimistic about future output, underpinned by plans for investment in new product ranges. However, the degree of confidence dipped to a 19-month low in September, with firms wary of ongoing supply chain challenges and weak demand.

"Although historically elevated, the degree of optimism dipped to the lowest since February 2023," the report concluded.