The seasonally adjusted S&P Global Russia Services PMI Business Activity Index was a disappointing 47.6 in June, down from 49.8 in May, and falls further below the 50 no-change benchmark. The fall signals a “back-to-back declines” in the service sector’s output, according to S&P Global. (chart)

“The fall in activity quickened to a modest pace that was the steepest since December 2022. Lower output levels were often attributed to weak client demand and an associated contraction in new business,” S&P Global said in a note released on July 3.

However, the services result follows on from another robust month of growth for Russia’s Manufacturing PMI that was up slightly in June to 54.9, up from 54.4 in May, well above the no-change benchmark. Russia’s productive sector enjoyed the fastest pace of growth in three months, thanks to the ongoing war spending. (chart)

Russia is currently enjoying the fast growth in its manufacturing PMI in Europe, where many of the leading economies are seeing their PMIs contract. Taken together, the S&P Global Russia Composite PMI Output Index fell into the red by posting an index number of 49.8 in June, down from the 51.4 result in May that was still in the black. The fall signals a fall in business activity at Russian private sector firms and “the decrease in output was the first since January 2023, albeit only fractional overall,” S&P Global said.

The decline in Russian service sector activity gathered pace during June. Output fell at a sharper rate amid a renewed downturn in new business. The decline in new orders was only slight overall, but it nevertheless ended a 16-month period of expansion, reports S&P Global.

“Lower new sales weighed on business confidence, as firms recorded the lowest degree of optimism in the outlook since July 2023. Nonetheless, service providers continued to take on new workers as backlogs of work were depleted at only a fractional pace,” S&P Global reports.

Inflation remains the bugbear, with higher labour, transportation and supplier costs all driving the rate of input price inflation up during June. In response, firms raised their selling prices at the quickest pace in five months that is keeping inflation rates high, despite the crushing 16% prime interest rate imposed by the Central Bank of Russia (CBR). Because of stubborn inflation that is not responding to the CBR’s tight monetary policy, economists are expected at least one more 100bp rate hike this year.

At the same time, firms partially passed through higher costs to their customers via another monthly increase in selling prices. The pace of charge inflation quickened to a five-month high and was historically elevated.

“Contributing to the decline in business activity was a renewed drop in new orders at Russian service providers in June. Panellists stated that the reduction in new sales was due to lower purchasing power among clients and a fall in customer numbers. Although only marginal, the decrease was the first since January 2023,” S&P Global.

The falling service orders suggests that Russia’s military Keynesianism boost has run its course, at least in the services sector, although spending on arms means that the bump to the economy has further to run in the manufacturing sector.

“Despite a decline in services new business, overall new orders increased midway through the year as manufacturers recorded a sharper upturn. Nonetheless, the rate of growth in total new sales was the slowest in the current 17-month sequence of expansion,” said S&P Global.

Despite a drop in new order inflows, Russian services firms continued to hire additional workers during June, albeit at a marginal pace that was the slowest in four months. The panellists said that increased headcounts stemmed from more full- and part-time workers.

Backlogs of work declined for the third successive month in June. Firms noted that a combination of sufficient capacity and reduced new orders allowed them to work through incomplete business. That said, the rate of depletion in unfinished work slowed and was only fractional overall.

“Muted client demand dampened business confidence, however, as the degree of optimism in the outlook for output over the coming 12 months dropped to the lowest in almost a year. Nevertheless, the level of positive sentiment was in line with the series average as firms were buoyed by hopes of an improvement in demand and planned spending on new service lines,” S&P Global reported.

Finally, business confidence slipped to a ten-month low in June, despite more upbeat expectations among manufacturers.