Russia’s service sector came close to stagnation in March, according to the latest S&P Global PMI data, posting 50.1, just a tick above the 50 no-change benchmark. (chart)
Coupled with the anemic manufacturing sector result, Russia’s economy is now slowing sharply as predicted by the Central Bank of Russia (CBR) last summer as part of a plan by the economic authorities to bring down persistent inflation. The regulator is attempting a soft landing for the overheated economy, but the tools being used – crushing corporate and consumer credit, nixing generous mortgage subsidies – are so crude that the CBR runs the risk of crashlanding the economy.
Business activity in the services sector, which is more sensitive to economic fluctuations than manufacturing, remained broadly unchanged at the end of the first quarter, with the seasonally adjusted Services PMI Business Activity Index falling to 50.1 and down from 50.5 in February.
“The subdued performance marks the end of an eight-month expansion streak and reflects softer demand conditions and weakening new order growth,” S&P Global said in a note. “While service firms continued to register rising backlogs of work, staffing levels fell for the first time in 20 months. The decline was modest, but still the steepest since early 2021.”
The March PMI figures suggest that Russia’s broader economic growth of 4.1% y/y for the last two years is faltering. Predictions for economic growth vary, but Russia is probably on course for at most 2.5% growth this year.
The downturn was driven primarily by weakness in the manufacturing sector, where output and new orders both declined. The Manufacturing PMI fell into the red in March posting48.2, its lowest since April 2022, shortly after the start of the war in Ukraine. That figure marked a steep fall from January’s relatively strong reading of 53.1, underscoring growing pressure on both domestic and export demand.
The Composite PMI Output Index—which combines services and manufacturing—fell to 49.1 from 50.4 in February, signalling a marginal but noticeable contraction in overall private sector activity. This was the sharpest decline since December 2022.
In the service sector, new business continued to increase in March but at a notably slower pace—its weakest rate since July last year. Firms cited concerns about reduced customer purchasing power, a sign that household demand may be coming under strain amid persistent, if easing, inflationary pressures.
Hiring trends were also affected. The loss of momentum in demand prompted the first round of job cuts in the services sector since July 2023, and the sharpest decline in staffing in over two years. However, firms suggested that the reductions were largely due to natural attrition, with voluntary leavers not being replaced.
Despite weaker order books and job shedding, Russian service providers remained surprisingly optimistic. Business confidence hit its highest level since May 2024, buoyed by expectations of improved demand and expansion of service offerings.
Price pressures remained relatively subdued, which is the point the CBR’s heavy handed tactics and so a plus. Although input costs rose at a faster rate in March—mainly due to higher wages and logistics costs—the rate of increase was still historically soft. Selling prices also rose, but only marginally, as firms sought to balance the pass-through of cost pressures with the need to remain competitive. The result was the slowest rise in output charges since January 2021.
Across the private sector, employment contracted overall. While manufacturers marginally expanded their headcounts, this was more than offset by service providers, who posted the steepest job cuts since the beginning of 2023.
S&P Global analysts noted evidence of easing inflationary pressures at a macro level. Overall input price inflation was the weakest since June 2020, helped by favourable exchange rate movements that curbed the cost of imported goods. If the slow-down runs out of control some have been predicting a wave of bankruptcies later this year, whereas other economists have argued the Russian economy is more robust than first appears and the chance of a crisis remains low.