04.11.22 Review

October Worsening: leading economic indicators show sharp drop in services

October leading indicators confirm speculation of a deteriorating economy, with the services PMI falling from September's 51.1 to 43.7, reflecting the collapse in consumer demand and the devastating effects of the mobilisation. The decline in the manufacturing PMI index was moderate and remained positive, but manufacturers are concerned about staff shortages and rising costs. The composite business activity PMI index fell to 45.8 in October from 51.5 in September, which indicates a severe slowdown in private sector activity.

Like business surveys, leading economic indicators in October show a reversal of economic trends after a summer stabilization period and predict a resumption of the economic decline. The services PMI fell in October from 51.1 to 43.7, which is the sharpest drop since March when the index was below 40 points (a figure above 50 indicates an increase in business activity, while a fall below 50 indicates a decrease). The dramatic decline in service sector activity has mirrored the devastating effects of mobilisation on consumer demand and has led to lower hiring and higher layoffs — the sharpest since the pandemic May  of 2020. Expectations have moved into a negative zone amid declining consumer purchasing power and growing uncertainty. Real disposable income, according to Rosstat, fell by 3.4% year-on-year in the third quarter, following a 0.8% decrease in the second quarter. The October "InFOM" survey has shown a deterioration in consumer expectations and increased adaptive behavior by purchasing cheaper goods, refusing some planned spending, and buying for future use.

The manufacturing PMI fell more moderately to 50.7 in October from 52 in September, remaining slightly above neutral and above expectations. Growth in output and new orders was lower than in previous months, with cost increases estimated by businesses to be the fastest since May and employment declines the most severe since April (some manufacturers have noted hiring problems due to tight labor supply). At the same time, the assessment of the situation's development outlook for the next year has remained quite optimistic amid expectations of demand revival and investments in development. Expectations of an improvement in consumer demand dynamics are reasonable: the banks' data on consumer spending indicated some recovery in the last weeks of October after a late September decline. According to SberIndex's data, consumer spending has returned to the indicators of August and early September  — 6-7% growth in nominal terms, which gives hope that the pressure of military mobilisation on demand will be exhausted.

Overall, the composite PMI fell to 45.8 in October from 51.5 in September, indicating a sharp slowdown in private sector business activity. The decline was driven mainly by the service sector, as manufacturers recorded small output growth. Similarly, a decrease in new orders in the service sector outweighed a slight increase in manufacturing in October.

PMI Business Activity Index, February-October 2022

Operational data on freight turnover indicate that the number of commuter rail passengers dropped sharply in October (by 5.4% year-on-year), which may be caused by "partial mobilisation," according to analysts at Raiffeisenbank (their review of economic dynamics is available at Re: Russia). At the same time, passenger turnover remained in the double-digit growth zone, slowing down, however, from 28.2% to 15.5% in October. October's loading and cargo turnover volume declined by 3 and 3.6%, respectively. Loading of coal, timber, and fertilizers — the main contributors to the decline, decreased by 12.9%, 31.0%, and 16.2%, respectively, on a year-on-year basis. At the same time, according to the Center for Macroeconomic Forecasting calculations, "there was no significant change in industrial activity in October, based on an indirect estimate". This applies to electricity consumption and the main types of rail transport.

In the absence of noticeable pressure from demand, inflation remained low in October, although its weekly and monthly rates have increased. Weekly inflation in the second half of October rose to 0.07-0.08% (corresponding to an annual rate of about 4%) against 0.02-0.03% in previous weeks. Based on the operational data, the annual inflation rate decreased to 12.7% by the end of October. If the current price growth rate stabilizes, yearly inflation will continue to slow as the high base effect of late 2021 — early 2022 wears off, Raiffeisenbank analysts believe.