Russia’s economy has been growing to the point where the Central Bank of Russia (CBR) has warned that it may be starting to overheat thanks to the heavy budget spending on the military. However, the latest manufacturing production producers index suggests the economy is starting to come off the boil, although it is still expanding. (chart)

The seasonally adjusted S&P Global Russia Services PMI Business Activity Index registered 54.0 in July, down from 56.8 in June, but still comfortably above the 50 no-change benchmark, the consultancy reported on August 3.

“The latest data signalled a solid expansion in service sector output, in line with the long-run series average, albeit the slowest since February amid some reports of emerging customer hesitancy. Where a rise in activity was noted, firms attributed this to a further uptick in new business and a larger client base,” S&P said in a press release.

The services result follow on from the seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers’ Index (PMI) posting of 52.1 in July, which was slightly down from 52.6 posted in June. The result signalled a “modest upturn in operating conditions at Russian manufacturers,” the S&P report said, adding that the improvement was the slowest for nine months, though remained sharper than the long-run series average.

Taken together the S&P Global Russia Composite PMI Output Index posted 53.3 in July, down from 55.8 in June, which signalled a solid expansion in output across the Russian private sector. “That said, the rate of growth slowed to the weakest since February amid softer upturns in manufacturing and service sector activity,” S&P added.

Russian service sector firms recorded another monthly expansion in business activity at the start of the third quarter, according to the latest PMI data from S&P Global.

“Greater output was supported by a further rise in new business amid sustained client demand. That said, rates of growth for both output and new business eased from June. Dampening the upturn in total new orders were broadly stagnant new export sales, as foreign client demand softened. Meanwhile, firms were able to work through their backlogs, causing firms to scale back their hiring and leave workforce numbers largely unchanged on the month,” S&P said.

At the same time, the depreciation of the ruble against the dollar reportedly pushed up imported goods prices, as input costs rose markedly. Firms sought to pass through higher input prices to customers, resulting in the steepest rise in output charges since May 2022, S&P said. The rate of new order growth slowed notably from that seen in June, with the pace of expansion weaker than the series trend. Nonetheless, the latest upturn in new orders extended the current sequence of increase to six months, and was linked to a sustained rise in customer demand and the acquisition of new clients.

Russian exports have been negatively impacted by sanctions and few exports are happening, according to S&P.

“Weighing on the increase in total new orders was a near stagnation of new export business at the start of the third quarter. This followed two months of sharp expansions in foreign client demand. Firms stated that logistics issues often hampered growth, S&P said.

The reappearance of inflation is also starting to make itself felt after falling to historic lows in rencent months.

“July data indicated faster increases in input costs and output charges at service providers. Panellists often mentioned that the depreciation of the ruble against the dollar pushed up imported goods prices, with supplier charges also rising,” S&P said. “The rate of input price inflation quickened to the sharpest since January.”

As demand conditions remained accommodative to higher selling prices, firms passed through greater cost burdens to clients via a hike in output charges. The pace of increase in output prices was substantial and the fastest in over a year, which is adding to the underlying inflation pressures.

A softer rise in new orders and the ability to manage workloads in a timely manner led firms to leave their workforce numbers broadly unchanged during July. The nearstagnation in employment ended a five-month sequence of job creation, although overall unemployment remains at historic lows and the labour market remains very tight.

Finally, businesses remained optimistic in the outlook for activity over the next 12 months in July. Confidence reportedly stemmed from planned investment in developing new product lines and reaching out to potential new clients.

“The weaker increase in output reflected softer demand conditions across both monitored sectors. At the same time, there was a renewed fall in new export orders led by a solid contraction in manufacturing new export sales,” S&P said.

Pressure on capacity dwindled in July, as firms worked through their backlogs of work successfully following further hiring activity. Employment growth stemmed from the manufacturing sector, while service providers saw staffing numbers broadly unchanged.