13.09.22 Review

The Economy of Waiting: after four months of growth PMI Business Activity Index falls; slump of the Central Bank’s similar index stopped only by entrepreneurs faith in a prosperous future

The S&P Global Russia Composite PMI, which tracks business activity in the manufacturing industry and service providers, fell from 52.2 to 50.4 in August after rising between April and July. The economy was under pressure from the services sector, which suffered rising costs and reduced consumer spending. Even noticeable growth in manufacturing production could not compensate for the losses. It’s important to note, however, that the growth cannot be attributed to how entrepreneurs assess the current situation. Rather, it can be credited to their expectations for the future, which are optimistic, but seem to be a compensation for the excessive pessimism seen in spring, according to experts. Monitoring conducted by the Central Bank in August paints a similar picture: as businesses exhibit positive expectations, these expectations offset worsening assessments of the current situation. As a result, the composite index increases slightly, while assessments of the current situation worsen. The composite PMI index’s decline can’t be considered a trend reversal quite yet, but the growth of optimism in the summer also can’t be used as an indicator of the situation having stabilised. The economy is currently being supported by “crisis optimism”, not by fundamental factors.

A PMI reading above 50 indicates an increase in business activity and below 50 indicates that activity is generally declining. The manufacturing industry’s PMI rose to 51.7 in August, up from 50.3 a month earlier (having been seasonally adjusted). This was the highest level on record since January 2022. The recovery is the result of stronger domestic demand, yet at the same time, export sales of Russian businesses have continued to fall. In August they reached their fastest decline rate since May, according to S&P.

PMI index, Russia, January-August 2022

These values need to be treated with caution: after sharply sinking in spring, the PMI started growing. Data on industrial production lagged behind, although both indicators are closely related, notes the Solid Numbers Telegram channel, run by economists from VTB Capital. According to them, the differences in dynamics can be explained by the fact that the PMI includes entrepreneurs’ expectations, in addition to their assessments of the current situation. “Hard Figures” notes that the optimism seen in summer is merely a compensation for the excessive pessimism of February-March. This points to an overall decline in confidence among entrepreneurs in the manufacturing sector. 

August statistics provided by the business climate indicator of the Central Bank confirm this data. The composite indicator has improved slightly from 0.4 to 0.6 as a result of the current index falling sharply from -5.8 in July to -6.6. This was noticeably offset, however, by the growth of business expectations regarding changes in demand and production over the next three months (from 6.9 in July to 8.1 in August). At the same time, farmers account for a significant part of the optimism as they are currently anticipating a record harvest, analysts of the Central Bank note. There has also been an increase of optimism among vehicle dealers as well, mostly due to the introduction of parallel imports and Chinese products. Pessimism runs high in the metallurgy sector. 

Many industrial companies in August hiked their product prices and partially passed the costs on to customers, S&P notes. Due to an increase of spending on material and utility costs, as well as salaries, companies were forced to raise their prices over the last three months as operating costs also shot up. 

Across the services sector, the PMI fell to 49.9 points against 54.7 in July. Service providers mentioned an influx of new customers and an increase in the number of new orders. However, business expansion noticeably weakened compared to July. A portion of entrepreneurs reported a reduction in business, as a result of consumer’s purchasing power decreasing, S&P notes. 

To add to this, consumer spending dynamics have been weakening since August, according to SberIndex data. The rebound in consumer spending turned out to be short-lived: in July, Russians spent 10.5% more on average compared to 2021 (with annual inflation at 15.1%). In August they spent 6.4% more compared to a year earlier, with annual inflation standing at 14.3%. This means that spending in August 2022 was actually down by 7% compared to last year. The situation looks better in food and service consumption, whilst durable products lost more than 14% in real consumer spending. 

Although the PMI’s fall in August shouldn’t be seen as a shift in trends quite yet, it is important to keep in mind that the summer improvement of indexes relied on overblown expectations and “crisis optimism”, instead of a change in fundamental factors.