Russia’s services PMI stutters as recovery runs into inflation headwind

Russia’s services PMI stutters as recovery runs into inflation headwind
Russia' service PMI expanded again in June, but slowed in month-on-month terms as supply chain problems, high inflation and a new wave of the pandemic weighed on business.
By bne IntelliNews July 5, 2021

Russia’s seasonally adjusted IHS Markit Russia Services Business Activity Index registered 56.5 in June, down from 57.5 in May, but still well above the 50 no-change mark, as services continue to recover from last year’s annus horribilis.  

The services result brings some relief after soaring producer prices caused the manufacturing PMI to shrink for the first time this year in June. The headline seasonally adjusted manufacturing PMI posted a contraction of 49.2 in June, down from 51.9 in May and below the no-change 50 market, which signals a contraction.

Combined, the expansion in services helped keep the IHS Markit Russia Composite PMI Output Index comfortably in the black, posting 55.0 in June, but manufacturing dragged the overall result down from 56.2 in May. The overall upturn was broad-based, but led by a sharp expansion in the service sector.

The manufacturing result has bucked a trend of rapid and extreme expansion of the PMI index in Central Europe, where several countries posted all-time record-high expansions in June.  

Poland's PMI climbed to 59.4, a new historic high, from 57.2 the previous month, smashing the consensus figure of 57. And the Czech Republic Manufacturing PMI index did even better, soaring in June to an extraordinary 62.7 – also an all-time high.  

However, problems in supply chains could take the edge off growth in all the regions. Even in the booming Polish and Czech markets the Markit panelists were complaining about rising input costs and lack of labour driving up costs and feeding inflation. Czechia and Hungary were the first two EU members to hike interest rates as a result, and Poland is expected to follow suit soon.  

Russia has the same problems with knobs on. Producer prices in Russia jumped 35.3% year on year in May of 2021, the highest level since the series began in 2005, according to the latest Central Bank of Russia (CBR) figures. The rapid growth in PPI is also being driven by problems in supply chains and “demand inflation”, according to the CBR, which is proving very difficult to contain. Worries about soaring producer prices are starting to eat into the optimism that Russian business was feeling in the first quarter, that had also been at an all-time high.  

Nevertheless, the positive push that the crisis-recovery has given the economy is still outweighing all these problems to keep the PMI expanding. And as most of these problems are due to the shock and recovery effects of a crisis, they are expected to fade of their own accord as the economies throughout the region find a new post-crisis equilibrium. The fact that everyone’s recovery is synchronised thanks to the global nature of the pandemic is also a plus, as it will help lift the weaker countries as the momentum of the stronger ones carries them along.  

Services on the mend

On the ground Russia’s services sector performed well. Services were the hardest hit by the lockdowns and now restrictions have largely been lifted they have bounced back strongly.  

Having said that, Russia is currently being hit with a third wave of the epidemic, largely caused by the Indian variant of the virus, that has seen daily infection rates jump to over 20,000 a day – the fourth-highest in the world – and mortality climb to over 600 deaths a day, a high last seen at the start of the year.  

The authorities are desperately trying to avoid a new lockdown, but have introduced mandatory vaccination for 60% of service sector workers and punitive fines for companies that ignore the order. Having ignored the vaccination issue for months, the government's harsh action has provoked a jump in demand for vaccinations and long queues have suddenly appeared outside vaccination stations, while the spike in demand means some of them are running out of doses.  

At the same time, the Moscow City authorities have introduced a QR code system for bars and restaurants, closing them off to anyone other than those that have been vaccinated or can prove they have anti-bodies via a medical certificate. That system is designed to keep shops and bars open.  

“June PMI data indicated a further monthly expansion in business activity across the Russian service sector. The rate of growth slowed from that seen in May, but was still the second-fastest since August 2020 and sharp overall,” Markit said.  

Anecdotal evidence suggested that new sales growth was due to sustained increases in client demand, with the latest expansion extending the current sequence of growth to six months, reports Markit. 

“The upturn in output continued to be supported by stronger client demand, with new export orders rising at the quickest rate for just over two years. Reflecting efforts to ease pressure on capacity, firms expanded their workforce numbers at the sharpest pace since May 2011. Robust demand conditions reportedly boosted business confidence, which reached its highest since May 2019,” Markit added.  

The recovery has seen unemployment rates fall from a peak of 6.3% in October, up from post-Soviet lows in 2019 to the current 4.9% in May. The rate of job creation was sharp overall and the steepest since May 2011, Markit reports. 

But even in services inflation remains a problem. Inflationary pressures have remained historically elevated despite rates of increase of both input prices and output charges easing, Markit reports.  

At the same time, cost pressures remained historically elevated in June. Although the rate of input price inflation softened from that seen in May, it was quicker than the series trend. Companies stated that higher cost burdens stemmed from greater supplier prices and wage bills, Markit reports. 

Consequently, firms still sought to pass on increased input prices to customers where possible. Despite the rate of charge inflation easing from May's peak, it was the second-steepest since January 2019.