Russian service providers reported continued growth in October 2024, with a rise in both output and new orders, according to the latest PMI survey from S&P Global released on November 6. (chart)

Key Insights:

• Russian Services PMI Index: October rises to 51.6, indicating modest growth.
• Manufacturing Sector Rebound: Slight improvement after September contraction, PMI at 50.6.
• Inflationary Pressures: Input costs and selling prices rise sharply amid supplier and wage increases.
• Employment Growth: Service sector hiring accelerates, primarily in full-time roles.
• Business Confidence: Dips to near 15-month low, but optimism for future growth persists.

The seasonally adjusted Russia Services PMI Business Activity Index climbed to 51.6 in October from 50.5 in September, indicating a modest but accelerating expansion of activity across the sector. However, the rate of expansion remained below historical averages.

"Greater new orders supported the latest expansion," according to anecdotal evidence, although the pace of growth in new sales was described as "subdued in the context of historic data."

Service sector output in Russia rose at a faster rate compared to September, driven by stronger demand conditions, but the overall pace of growth was below the long-run average. New orders increased for the fourth consecutive month in October, though the rate of growth moderated slightly. Survey respondents attributed the rise to "the acquisition of new customers and a further improvement in demand conditions."

The Russian manufacturing sector showed a slight improvement as well in operating conditions in October after a decline in September, according to the latest PMI data from S&P Global. This indicates a tentative recovery for the Russian manufacturing industry.

As followed by bne IntelliNews, Russia's manufacturing sector contracted in September, marking the first decline in 28 months, as weak demand, supply chain disruptions, and material shortages hampered production.

But the sector recovered in October. The seasonally adjusted S&P Global Russia Manufacturing PMI posted 50.6 in October 2024, up from 49.5 in September, and above the 50.0 no-change mark, indicating expansion.

The data compiled by S&P suggests a marginal improvement in the health of the manufacturing sector, following a slight deterioration in operating conditions at the end of the third quarter. However, the rate of overall growth was below the series average in October, highlighting a measured recovery in Russia's economic activity.

Combined, the S&P Global Russia Composite PMI Output Index posted 50.9 in October, up from 49.4 in September, indicating modest growth in business activity across the Russian private sector. The expansion stemmed from a slower decline in manufacturing production and quicker growth in services output, but the rate of expansion is slowing as Russia’s economy is cooling as the military Keynesianism effects begin to  wear off and high inflation and prime rates weigh on activity.

A further increase in services new business and only a fractional decline in manufacturing new orders led to faster growth in total new sales at the start of the fourth quarter. Meanwhile, quicker increases in both input costs and output charges across the private sector signalled stronger inflationary pressures in October. Greater staffing and supplier costs were reportedly passed through to customers, with price upticks broad-based by sector.

Although private sector firms continued to register a decrease in outstanding business, both manufacturers and service providers expanded their staffing numbers. Amid increased workloads, Russian service firms took on additional workers at a slightly faster pace. Employment growth was primarily concentrated on full-time positions, as businesses responded to improving demand conditions. Backlogs of work fell for the seventh consecutive month, though the decline was marginal.

Inflation remains a major headache. Cost pressures continued to build, with input costs rising at their fastest rate since July, driven by "hikes in supplier prices and wages." Survey panellists linked the increase to "unfavourable exchange rates, greater supplier prices, and increased wage bills."

These rising costs prompted firms to pass on higher prices to their customers, leading to the steepest increase in selling prices in three months. The rate of charge inflation was described as "the quickest since July," reflecting the ongoing pressure on business margins.

Despite the increase in business activity, concerns over profitability appeared to weigh on sentiment due to a prime interest rate of 21%. Business confidence among Russian service providers "dipped to the second-lowest since July 2023 (behind July 2024)," indicating a cautious outlook for the sector. Nonetheless, companies remained optimistic about future growth, underpinned by planned investments in facilities and equipment and expectations of stronger demand.

The survey data, collected from October 10 to 29, also highlighted that "output expectations for the year ahead remained positive". Although optimism was tempered by pressure on margins, firms continued to see opportunities for expansion in the coming months.

Overall, the Russian service sector is displaying signs of resilience, with a measured expansion in activity and hiring, despite facing challenges from cost inflation and moderate demand conditions. The data suggests that while growth continues, businesses remain wary of the broader economic environment in Russia.