The health of the Russian manufacturing sector continued to improve in July, albeit slowing growth momentum as compared to the previous months, according to the latest data from S&P Global. (chart)

As followed by bne IntelliNews, despite the fallout from Russia's full-scale military invasion of Ukraine, the manufacturing sector ended 2022 with a historically strong expansion in output. Manufacturing PMI since January 2023 continued to trend in positive territory.

However, a closer look at July's PMI report suggests that manufacturing sector is running into capacity constraints as indicated by rising input costs and inventory depletion. This is in line with most recent reports that Russian industry is operating at record-high capacity utilisation and is close to overheating. 

The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers’ Index (PMI) posted 52.1 in July, above the no-change mark of 50.0 indicating expansion, and slightly down from 52.6 posted in June “to signal 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.

New orders growth slowed in July, with the rate of expansion easing for a second successive month. Nevertheless, the manufacturing firms highlighted sustained client demand and the acquisition of new customers.

While export orders declined in July, domestically higher selling prices were often noted as the driving factor behind lower customer interest. This, in turn, resulted in a softer increase in output during July.

Most notably, input costs rose at a marked pace during July, with the rate of inflation quickening markedly from June and being the sharpest since April. The rate of output charge inflation was the steepest in 15 months and well above the long-run series average.

“Anecdotal evidence suggested that, alongside hikes in supplier prices, the depreciation of the ruble had led to higher costs for imported goods,” S&P commented.

Nevertheless, “hopes of stronger demand conditions, a sustained increase in new orders and planned investment in product development led to improved expectations regarding the outlook for output over the coming year,” according to S&P, with manufacturers showing the most upbeat sentiment since March 2019.

While hopes for stronger demand maintained high employment activity, logistics challenges and “some reports of supplier shortages” resulted in another monthly deterioration in vendor performance. S&P warns that delays were the most pronounced in 2023 to date. 

This led the manufacturers to tap into inventories to support production and fulfil new order requirements, with pre-production inventories falling at the quickest pace since September 2022. At the same time, stocks of finished goods contracted and declined at the fastest rate in almost a year.