Gradual recovery in Russian manufacturing continued in July

The July survey of Russian purchasing managers from VTB Capital indicated that an overall improvement in business conditions in the manufacturing sector was achieved for the seventh successive month. Moreover, the rate of expansion edged up fractionally since June to the strongest since April 2008. This reflected faster growth of new orders and a resumption of employment growth. Production growth slowed since June but remained solid overall, while firms stepped up purchasing activity. Inflationary pressure on firms’ input costs eased during the latest period.

The headline figure from the survey is the seasonally adjusted Russian Manufacturing Purchasing Managers’ Index, a composite indicator designed to track overall business conditions. Any figure greater than 50.0 signals improvement. At 52.7, little-changed from June’s 52.6, the PMI was at its highest level since April 2008. It also compared favorably with its long-run trend of 52.1.

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
Underpinning the overall improvement in business conditions in July was a further strong rise in new work received. New orders have increased ten times in the past thirteen months. Moreover, the rate of growth strengthened since June to the fastest since April 2008. This was despite a modest fall in new export contracts during the latest period.

New order growth supported production in July. The current sequence of rising output now extends to one year. The pace of expansion remained solid (and greater than the long-run survey average), despite easing since June. Nevertheless, backlogs of work continued to decline during July, suggesting factories had yet to reach full capacity.

Prices
Suppliers’ delivery times lengthened further in July, with some firms commenting on delayed imports and raw material shortages. This contributed to rising input prices. The rate of input cost inflation was sharp in the context of historic survey data, but eased further from May’s twenty-two month high.

Output prices in the Russian manufacturing sector rose for the 13th month running in July. The rate of inflation was solid overall, but slowed to a four-month low. Output price inflation was again limited by competitive pressures.

Employment and purchasing
Manufacturers raised their volumes of input buying at a faster rate in July. Purchasing activity has expanded every month since September 2009, and the latest growth was the strongest since March 2008. Despite this, input stocks continued to fall, reflecting robust production growth. The level of final goods stocks across the sector also fell during the month, which firms linked to higher sales.

Employment growth in Russia’s manufacturing sector resumed in July. Firms have added to their workforces, on average, three times in the past five months, but the rate of expansion was only marginal in the latest period.

Commenting on the survey, Dmitri Fedotkin, economist at VTB Capital, reported: “In July, the Russian Manufacturing PMI increased only marginally, to 52.7 (from 52.6 in June), suggesting that the pace of expansion was sustained in the manufacturing sector. Although the output sub-index eased to 55.3, the new orders growth sub-index rose to 54.6, despite the new exports sub-index slipping into the red (48.3) as demand for Russian products fell. On a more positive note, the employment sub-index bounced back above the no-change 50 level to 50.8, while inflationary pressures moderated with both input and output prices sub-indices declining for the second month in a row (to 63.7 and 54.9, respectively). Respondents once again cited commodity prices as the key inflationary drivers.”