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Russia: Manufacturing PMI in contraction mode

Mon, Sep 1 2008, 12:50 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S


Recent data out of Russia shows that the much-needed cooling of the overheated Russian economy is now under way. The purchasing managers' index (PMI) for the manufacturing sector in Russia, released today, contracted rapidly in August. The headline index declined to 49.4 from 50.4 in July. The index was above 55 in January, following the re-acceleration of the Russian economy during Q4 07.

Today's reading is the lowest since November 1998, and it is the first time since November 2004 that the index has fallen below 50 - the mark that separates growth from contraction. Glancing at PMI subcomponents it is especially new orders and output that fall, and this reflects that domestic demand for Russian manufacturing goods is declining. It is however positive for the Russian manufacturing sector that cost price pressures are declining somewhat as global energy prices stabilise. Hence the input price component shows its biggest decline in the history of the survey - albeit still at an elevated level.

There are other signs that the Russian economy is cooling off. Industrial production is trending downwards, retail sales and investment growth rates have declined and wage pressures have stopped worsening. The slowing of the Russian economy makes the job for the Russian central bank (CBR) easier. The CBR has on several occasions during 2008 tightened monetary conditions to dampen domestic demand. Among other initiatives it has lifted the floor on the vital REPO rate, albeit without much success as local money markets stayed well below the REPO rate. In addition the CBR did not get much help from the Russian government, which carries out expansionary fiscal policies. Thus the CBR might welcome this latest tendency in data. Going forward we thus expect Russian growth to come out lower in 2008 than in 2007 (8.0% y/y); however, it should be a shift from sixth gear to fifth gear, and perhaps even to fourth gear if the conflict between Russia and Georgia/the West escalates further. For now, we believe that Russian authorities are probably not too unhappy about the cooling of the economy.

Published on  Mon, Sep 1 2008, 12:58 GMT


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