Russian manufacturing sector remained in fragile state in February

Business conditions in Russia’s manufacturing sector improved further in February, but the pace of growth remained lackluster, according to the latest survey findings from VTB Capital. Output rose for the seventh successive month, although new orders increased at a weaker pace and jobs were shed at the fastest rate since last August. Meanwhile, cost inflationary pressures built up.

The headline seasonally adjusted Russian Manufacturing Purchasing Managers’ Index (PMI) posted above the no-change mark of 50.0 for the second month running in February. It was the first time since July 2007 that the index has posted successive readings above 50.0. However, the latest figure of 50.2, down from 50.8 in January, signaled only a marginal overall improvement in operating conditions. The fall in the PMI mainly reflected weaker growth of both output and new orders, and a faster drop in employment.

The Russian Manufacturing PMI is derived from a monthly survey of 300 purchasing executives in Russian manufacturing companies which has been conducted since September 1997. Readings above 50.0 signal an increase on the previous month while readings below 50.0 signal a contraction.

Output and demand
The overall improvement in business conditions in the manufacturing sector in February was underpinned by a rise in the volume of incoming new work. New orders have increased in six of the past eight months, although the latest increase was only modest and weaker than in January. New export orders remained especially fragile, showing only marginal growth for the second month running.

Manufacturing production in Russia continued to rise in February. However, the rate of growth remained moderate and weaker than the long-run trend over 12.5 years of data collection.

Prices
Average input prices paid by Russian manufacturers rose for the 13th month in succession in February. Moreover, the rate of input cost inflation was the strongest since July 2008, and was in line with the long-run survey average. Anecdotal evidence linked rising costs to higher prices for energy, utilities, transport and metals in particular.

Manufacturers raised their charges for the eighth month running in February. However, the rate of output price inflation remained weak in the context of the historic average for the series. Although firms linked higher charges to improving market demand, pricing power was restricted as trading conditions remained challenging overall.

Employment and purchasing
The current sequence of falling employment in the Russian manufacturing sector was extended to 22 months in February. Moreover, the rate of decline accelerated to the fastest since last August. Continued job shedding reflected spare capacity in the sector, which was further illustrated by a sharper drop in backlogs of work in February.

Despite slower growth of new orders, manufacturers expanded input purchases at a faster rate in February. The latest rate of increase was the fastest since March 2008 and greater than the long-run survey trend. That said, the overall level of input stocks in the sector continued to decline.

Commenting on the survey, Dmitri Fedotkin, economist at VTB Capital, reported: “February’s Manufacturing PMI eased to 50.2 from 50.8 the month before but continued to point to a marginal expansion in activity across the sector for the second month in a row. The headline number was supported by the output (52.0) and new orders (51.7) sub-indices although both have posted weaker results than in January. The employment situation deteriorated further as respondents claimed improvements in business activity were too weak to justify new hiring. Costs continued to rise amid energy and metals prices as well as utilities and freight charges, but producers where able to pass some of the costs on to end customers.”