The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers’ Index PMI was up to 54.5 in September from 52.7 in August, the sharpest improvement in operating conditions since January 2017.  (chart)

“September saw a sharper improvement in the health of the Russian manufacturing sector, according to the latest PMI data from S&P Global,” the consultants said in a press release. “Supporting the upturn was a faster rise in output and the quickest increase in new orders since January 2017. The expansion was largely driven by domestic demand as foreign customer orders rose only marginally.”

“Buoyed by greater new sales, goods producers boosted employment at the steepest rate in almost 23 years, with output expectations for the year ahead also improving,” S&P Global added. “Concurrently, input buying rose at a survey record pace with firms seeking to build safety stocks.”

As reported by bne IntelliNews, Russia’s liberal economic elite have been sounding increasingly optimistic recently as Russia’s economic performance continues to improve. At a conference last week Prime Minister Mikhail Mishustin declared “the worst is over” and that Russia is on track to grow by 2.8% this year. Russian Finance Minister Anton Siluanov also said the Ministry of Finance (MinFin) would hit its inflation target of “2% of GDP or less.”

Stronger demand conditions contributed to a fourteenth successive monthly expansion in output in September, reports S&P Global. The rate of growth was the fastest since June and broadly in line with the series trend. Panellists stated that the upturn was led by a sharper increase in new orders.

“New orders at Russian manufacturers rose at a steeper rate at the end of the third quarter, as the pace of expansion quickened to the fastest since the start of 2017,” said S&P Global. “Stronger client demand, new product launches and successful import substitution reportedly drove the upturn. The acceleration in growth was led by domestic demand, as new export orders increased at a slower and only marginal pace. Challenging economic conditions in key markets were noted as weighing on the rise in sales from abroad.”

The economy has been boosted by heavy war spending which will account for over 6% in Russia’s 2024 budget and the rising price of oil. The majority of Russia’s oil exports are now going outside of the sanctions regime that is bringing in fresh revenues to the Russian budget.

The one problem the Kremlin’s economic managers still face is high inflation that is still rising.

Supplier price hikes and unfavourable exchange rate movements pushed up input costs, with the rate of inflation accelerating, S&P Global’s panellists said. “Firms passed through higher prices to customers, as charges rose markedly on the month,” said S&P Global. Inflation was 5% in July and is expected to rise another one or two percentage points by the end of this year.

Manufacturers recorded a sharper hike in input costs during September as demand often exceeds supply. The rate of input price inflation was marked and the quickest since March 2022. Companies also suggested that unfavourable exchange rate movements pushed up the price of imported goods.

Amid a more accommodative demand environment, manufacturing firms were able to pass through higher costs to customers. Selling prices rose at a substantial pace that was the steepest since April 2022.

 

A tight labour market is also a constriction on growth, but less of a problem than inflation. However, the lack of labour has been pushing up a rapid rise in nominal wages that is in turn feeding inflation.

A greater inflow of new work led firms to expand production capacity in September. Buoyed by stronger expectations of increased output over the next year, manufacturers registered the sharpest rate of job creation since November 2000. Employment growth was also supported by an increased ability to find suitable candidates, reports S&P Global.

“Higher staffing numbers allowed firms to work through incomplete orders in a timely manner, as backlogs fell for the ninth month running. That said, greater new sales led to a slower rate of decrease, with unfinished work declining at the softest pace since March,” says S&P Global.

In line with increased production requirements, good producers sought to build safety stocks. Input buying rose at a survey record pace amid efforts to replenish depleted inventories. That said, both pre- and post-production inventories contracted in September as firms struggled to fully replenish current holdings of inputs and finished items. In fact, the latter fell at a strong rate that was the fastest since May 2022.