The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers’ Index (PMI) posted 54.6 in December, up from 53.8 in November as the performance of the sector improved at its strongest rate in almost seven years, S&P Global said in a note on December 29. (chart)

“A further sharp rise in new sales spurred firms to expand input buying and employment at increased rates, as optimism in future output was buoyed by a sustained rise in client demand,” S&P Global said.

However, since April there’s hardly been any increase in manufacturing output across the Russian economy when figures are seasonally adjusted, and even a slight downtick between September and October, according to Nicolas Trikett.

“This does not mean there is no capacity to sustain further expansions, but rather that the initial increases sustained by rising defence spending, which allowed the complete utilisation of existing plants, are largely over. The same dynamics are observed for the general industrial index of activity, highlighting that substitution is not taking place for consumer products at scale; rather, civilian manufacturing in key industries such as aviation is being subsumed to the war effort. But the initial boost from surging spending is over,” Trikett said in a recent article in Riddle Russia.

The seasonally adjusted S&P Global Russia Services PMI Index registered 56.2 in December, up notably from 52.2 in November as the Russian economy continues to benefit from a military Keynesianism boost.

The rise in business activity was steep overall and accelerated to the sharpest since August in the services sector. Service provider panelists said that greater output stemmed from strong demand conditions and a faster upturn in new business from both domestic and international customers.

Combined, the S&P Global Russia Composite PMI Output Index was 55.7 in December, up from 52.4 in November, to signal the sharpest expansion in business activity for four months.

Any result above the no-change 50 benchmark is an expansion.

Inflation

Inflation remains the main bugbear and cost burdens continued to increase at a marked pace in both services and manufacturing. However, the rate of inflation slowed to the weakest in six months, according to S&P Global.

However, S&P Global’s report that there are signs that inflation may have peaked in manufacturing, following the CBR’s steep rate hikes in December bring the prime rate to 16%, but is still rising in services.

“The pace of charge inflation remained well below September's recent high. The rate of increase was little changed from that seen in November and was the second weakest in six months. Panellists noted that competition moderated hikes in selling prices,” S&P Global said.

The pace of increase in selling prices of goods was similar to that seen in November and remained historically elevated as hikes in supplier prices were passed through to customers.

Against that, input prices at Russian service providers rose at a substantial pace in December, according to S&P Global. “Higher cost burdens were attributed to greater supplier and utility prices, alongside an uptick in wage bills. Despite the pace of cost inflation slowing from November, it was stronger than the series trend,” S&P Global said.

For services, input costs continued to rise at a historically elevated pace despite the rate of inflation slowing. Similarly, output charges increased at a marked pace, but one that was the slowest since May.

Output up on strong demand

Output at Russian manufacturers grew at the fastest rate since May thanks to strong customer demand and a sustained uptick in new order inflows. Concurrently new sales rose at a steep pace in December. Purchasing activity increased at a substantial pace that was the second sharpest since August 2006.

Greater client demand was largely focused on the domestic market, however, as new export orders for goods fell for the second month running. Fewer customer requests from clients in key export markets led to the fastest fall in new business from abroad since July.

But demand for services was more buoyant. Supporting the rise in business activity was an eleventh successive monthly expansion in new orders during December. Anecdotal evidence stated that increased new business was due to the introduction of new service lines, new client acquisitions and improved demand conditions, according to S&P Global. The rate of growth was steep in the context of historic data and the fastest in four months. Unlike goods, service growth is being driven by rising exports and greater demand in key export markets, according to panellists.

Employment

The buoyant Russian economy is creating new jobs in both services and manufacturing that is contributing to keeping the unemployment rate at an all-time low of 2.9%.

“In line with a stronger expansion in new business, service firms raised their workforce numbers on average in December in a bid to ease pressure on capacity. The rate of job creation was solid overall and the quickest since June,” said S&P Global.

December data signalled a steeper rise in employment at goods producers as well. Greater new orders spurred firms to expand workforce numbers, with the rate of job creation quickening to the fastest for three months. Increased staffing numbers supported efforts to deplete backlogs of work at the end of the fourth quarter, as work-in hand fell for the second month running.

Both services and manufacturing producers remain very optimistic about the outlook for 2024.

“Confidence stemmed from planned investment in new products and machinery. The level of positive sentiment was historically elevated despite dropping to a three-month low,” said S&P Global.

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