Russian services PMI rises to 48.2, but remains underwater as recovery continues to slow

Russian services PMI rises to 48.2, but remains underwater as recovery continues to slow
Russia services PMI rises to 48.2 in November from a five-month low of 46.9 in October, but remains in contraction territory as Russia's economic recovery continues to splutter / bne IntelliNews
By bne IntelliNews December 3, 2020

The seasonally adjusted IHS Markit Russia Services Business Activity Index registered 48.2 in November, up from October's five-month low of 46.9, but still below the 50 no-change mark.

The contraction in services follows on from the manufacturing PMI’s fall to a six-month low of 46.3, down from 46.9 in October.

Taken together, the IHS Markit Composite PMI Output Index posted 47.8 in November, up slightly from 47.1 in October.

Russia’s economy bounced back from the lockdown in the spring and summer thanks to a surge in consumption. However, the economy started to slow again in September and that was compounded the start of a second wave of the coronavirus (COVID-19) epidemic.

The situation may improve in the coming months as the authorities get ready to start mass immunisations on December 11, which will see the first 2mn Russians inoculated.

Services output decreased for the second month running, but the rate of decline was much slower than that seen during the depths of the pandemic in April, reports Markit. Lower business activity was often linked by panellists to muted client demand and COVID-19 restrictions.

“November PMI data signalled a further contraction in business activity across the Russian service sector. The coronavirus disease 2019 (COVID-19) pandemic and related restrictions reportedly weighed on demand once again as output and new orders fell. That said, both measures declined at a softer pace. Foreign client demand deteriorated once again, and to the greatest extent for six months. Meanwhile, business confidence remained historically subdued as near-term uncertainty also weighed on employment,” Markit said in a press release.

At the same time, cost pressures intensified notably. Input prices rose at their sharpest pace since January 2019, with firms able to raise their output charges at a slightly faster rate.

On the price front, Russian service sector firms indicated the steepest rise in average cost burdens since January 2019, when the rate of value added tax (VAT) was increased. The marked uptick in input prices was often attributed to hikes in wages and additional business costs associated with making the workplace COVID-19 safe.

Despite muted demand conditions, service providers were able to raise their selling prices again in November.

Inflation was running at 4% in October but is expected to rise to 4.2% by the end of the year, slightly over the Central Bank of Russia's (CBR) target rate of 4%.

New business received by service providers also fell further in November, as subdued customer demand weighed on total sales. A number of firms stated that cashflow issues among customers has reduced their ability to make new orders, reports Markit.

Although the rate of contraction in new business eased to only a modest pace, firms registered a faster downturn in new export orders. The decline in foreign client demand was marked overall and the fastest since May.

In line with lower new orders, services firms reduced their workforce numbers for the third successive month midway through the fourth quarter. The fall was also attributed to increased redundancies. The pace of job shedding eased slightly from that seen in October, however.

Unemployment has increased markedly in the last year from post-Soviet lows of 4.2% to 6.3% in October, where the rate has remained steady for the last few months.

A drop in pressure on capacity was also reflected in a sharp decrease in backlogs of work in November. The rate of depletion quickened to its steepest since May, as lower new orders allowed firms to complete outstanding business.

Finally, business confidence regarding the outlook for output over the coming year improved in November, despite remaining historically subdued. Where optimism was reported, firms linked this to hopes of an end to the pandemic and an uptick in client demand.