Russia’s manufacturing sector slowed again in August, according to the IHS Markit Russia Manufacturing Purchasing Index (PMI), which dropped to 49.1 in August, down from 49.3 a month earlier. 

Any number below 50 represents a contraction.

The August data continued to signal a deterioration in operating conditions across the Russian manufacturing sector, Markit reports. The overall decline was driven by the fastest contraction in new orders for over four years and partly stemmed from a sharper fall in new orders from abroad, the strongest since September 2016.

Nevertheless, the contraction was relatively mild in absolute terms and manufacturers remain optimistic about the outlook for the rest of the year. The level of optimism was the highest for four months and strong overall. Positive sentiment reportedly stemmed from new product launches and planned investment in new technology.

The PMI result tallies with Rosstat’s business consumer index, which has dramatically improved this year, posting a result of -1 for the last three months, but slipped to -2 in August. Still, business is much more optimistic following several years of pessimism during the silent crisis years of 2014-2016 when the business confidence index fell to a low of -8 as recently as December 2018.

On a more positive note the slowdown has taken the pressure off prices and inflation remains subdued. After falling to a post Soviet record low of 2.3% last year, consumer price inflation (CPI) rose to top 5% at the start of this year, but has fallen back as the summer wore on. Inflation is currently 4.7% and analysts are expecting it to fall to 3.8-4% by the end of this year. The producer price index of inflation (PPI) is also in retreat and fell to 1.1% in July.

Manufacturers attributed the rise in cost burdens to currency weakness which drove up the price of imported raw materials. Subsequently, firms partly passed on higher input prices to clients through greater charges.

Weighing on the headline PMI was a stronger contraction in new orders in August, reports Markit.

“The solid fall in new business was reportedly due to weak demand conditions and the loss of key clients. Moreover, external demand was further reduced, as new exports orders fell at the sharpest pace for almost three years,” Markit said in a note.

The Russian economy is recovering but the recovery in manufacturing is spluttering and the overall PMI composite index has been kept in the black by the services sector, which has also started to slow in recent months. The manufacturing PMI has been below the 50.0 no-change mark for three months in a row now.

Manufacturers indicated a decrease in workforce numbers in August, the fourth monthly contraction since April. The decline was broadly in line with the series average and attributed to lower new order volumes, with panellists expressing hesitancy towards hiring. Meanwhile, backlogs of work fell markedly. A reduction in pressure on capacity allowed firms to effectively tackle work-in-hand.

Siân Jones, economist at IHS Markit, which compiles the Russia Manufacturing PMI survey, commented: "The Russian manufacturing sector continued to signal a deterioration in August, with the fastest fall in new business for over four years weighing on overall operating conditions. Concurrently, domestic and external demand conditions weakened to a greater extent as firms reported a reduction in client numbers. Nonetheless, output fell only slightly as firms increased efforts to clear backlogs. Despite a rise in the degree of optimism towards output growth over the coming year, firms were hesitant to hire more employees amid a sustained decline in client demand. Confidence, however, reportedly stemmed from planned investment in new machinery and new product development."