05.10.22 Review

Optimistic Recession: September's leading economic indicators show improvement despite demand stagnation

August official data and September leading indices both show that the recession in the economy is slowing down. The PMI continues to improve; its September value in the industrial sector was the best since March 2019. At the same time, demand growth in the first half of September has rapidly slowed down. The overall decline depth at the end of August can be estimated at 4.3%. However, the emerging economic stabilization does not yet reflect the economy's response to the shocks of the announced mobilization.

The leading economic indicators in September look optimistically contradictory. First of all, the PMI indices continue to rise. In the manufacturing sector, which had been declining throughout the war months, the seasonally adjusted PMI reached the pre-Covid 52 points (a figure above 50 points indicates an increase in business activity, below — a decline). The growth was supported by a rebound in domestic demand, with an influx of new orders pushing the indicator to its highest since March 2019. The service sector PMI returned to the growth zone at 51.1 (after 49.9 in August). More nominal growth in this sector was also supported by domestic demand, but unlike in manufacturing, cost and price pressure remained significant. The composite PMI rose to 51.5 in September (after 50.4 in August), generally indicating a continuing rise in private-sector business activity. At the same time, according to the latest data from Russian Railways, the decrease in railroad loading volume (one of the key leading indicators of the situation in the industry) rose to -5.3% (vs. -5% in August) in annual terms. Although, this may be due to September 2021's good dynamics rather than the current September deterioration of the situation. 

Yet, as we have already mentioned, the economy is facing new challenges amid these positive signals. First, consumer demand will suffer from the announced mobilization and the mass exodus of Russians fleeing the threat of military conscription. According to "Sberindex", consumer expenses in the week from September 26 to October 2 increased in nominal terms by only 2.4% against the higher growth trend of the previous two weeks (4.4% and 4.2%). In addition, expenses in the last week, when the partial mobilization was announced, were supported by an abnormal airfare increase (38%). In contrast, during the following week, September 25-October 2, a significant decrease in service spending was observed. Expenses on non-food items for September 19-25 decreased markedly (-12.7% year-on-year vs. -9.2% the week before) and only slightly improved the following week (-12.2% year-on-year).

The latest official data on the general economic dynamics in August show a decline of GDP by 4.1% (according to the Ministry of Economic Development) in annual terms against a decrease of 4.3% in July and 5% in June. According to the Higher School of Economics calculations based on the Russian Statistical Service's data, seasonally adjusted changes in the output by basic types of economic activities and industry in August compared with July are close to zero. The calculations show a decrease of 3.3% by August 2021 in the output of the basic types of economic activities, but by the pre-war peak (December 2021), the reduction reached 4.3%.

Dynamics of output by basic activities, retail trade turnover, and industrial production, 100% = August 2021, seasonally adjusted indicators

In August, the decline in the retail sector, which had taken the brunt of the second quarter's decline in demand, also ceased. The decline in the retail segment in August was close to 9% in annual terms, and in the wholesale sector — more than 20%, says Russian Statistics Service.

The industrial sector in August showed almost zero dynamics (-0.1% year-on-year), and the main contributors to the positive dynamics were construction (+7.4%) and agriculture (+8.8%). At the same time, residential housing completions have been steadily declining since March. In agriculture, the rapid growth is associated with the low-base effect of last year, when the harvest campaign was held later, said Stanislav Murashov, chief macro-analyst at "Raiffeisenbank".

The economy looks better than expected this spring, but its 4.3% decline indicates a deep recession. Factors that support the economy may be soon exhausted (e.g., the surge in lending), and pressure from declining demand may rise due to the mobilization and outflow of hundreds of thousands from the middle-income groups.