Russia’s headline seasonally adjusted IHS Markit Russia Manufacturing PMI rose from 47.9 at the start of 2020, to 48.2 in February, but that is still a contraction, below the 50 no-change mark, IHS Markit reported on March 2.

Russia’s manufacturing sector has been struggling for years and what sporadic growth there has been has failed to gather any momentum. And February’s improvement is likely to be undone in March as coronavirus fears hit the global economy. China’s PMI collapsed to 38 in February – its worst fall in over a decade as workers across the country stay home to avoid infection.

Likewise, Russia’s industrial production in February was weak, posting a mere 0.2% gain year-on-year after a relatively strong 2.1 in December and results of around 3% growth for most of the months in 2019.

The virus has derailed what should have otherwise been a better year for Russia’s goods producers. The most recent business confidence survey, taken in January before the full impact of virus pandemic fears hit, also dramatically improved as the winter came to an end, rising from -6 to -2, according to a Rosstat survey.

However, Rosstat’s result conflicts with the Markit poll of manufactures who were a lot less optimistic.

“Business confidence continued to be weighed down by greater competition and weaker demand. The degree of optimism was among the lowest for over two years, despite firms highlighting hopes of an uptick in new orders and new product launches,” Markit said.

However, consumption is expected to improve this year after real income growth finally turned the corner on the back of increased government spending in the last months of 2019 and rapidly falling inflation.

Russia’s real wage growth in December accelerated by the highest rate in almost two years (6.9% y/y). Real incomes are starting to rise again and analysts anticipate this trend to continue throughout 2020 as the government increases spending. President Vladimir Putin said on several occasions recently that the top priority in 2020 is to increase incomes. 

The rise in wages immediately fed through into retail sales. The Russian economy’s consumer segment showed solid improvement in January 2020 – growth in retail sales accelerated to 2.7% y/y, volumes of residential housing rose 14.3% y/y and services to the population rose 1.9% y/y, according to Rosstat’s monthly report released on February 20. Consumption reappeared last year as an economic driver, although the effect on growth will be far more muted than it was in the noughties when wages were growing by about 10% a year for a decade.

The rate of deterioration in the health of Russia’s goods-producing sector eased in February to the slowest since last August; the latest data extended the current sequence of decline to ten months. But all this good news is likely to be undone by the pandemic fears.

The first signs of the coming slowdown were already apparent in February. Russian manufacturing firms indicated a further deterioration in operating conditions during February, albeit one that was the slowest for six months, according to Markit.

“Supply chain issues intensified in February amid the outbreak of coronavirus in China. Vendor performance deteriorated to a greater extent and backlogs were processed at a slower pace as firms struggled to source some raw materials,” Markit said in a report. “Russian manufacturers continued to register a contraction in production amid weak demand conditions.”

Still, on the bright side inflation remains subdued. Input costs rose at the slowest pace since the current sequence of inflation began in February 2009, Markit reports. The marginal rise in cost burdens was well below the long-run series trend and the sharp increase in input prices seen during the same period in 2019 following a hike in VAT. Manufacturers were able to partially pass on higher costs to clients, albeit to a historically subdued extent.

“The closure of supplier factories in China following the outbreak of coronavirus led to a greater deterioration in vendor performance in February. Lead times across the Russian manufacturing sector were extended as firms faced material shortages. Therefore, pre-production inventories were reduced further and utilised to supplement production,” Markit said.