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Russia - Output growth moderates in December

30 December 2011

The service sector grew at a softer pace in December, as did the combined output of manufacturing and services. Meanwhile, the longer-term outlook in services deteriorated substantially as companies reported domestic political uncertainty and global economic instability. Inflationary pressure on input prices moderated in both sectors since November, according to the final release of HSBC Russian PMI data for 2011 published by research firm Markit.

The headline figure for the services survey is the seasonally adjusted Business Activity Index, a single-figure measure designed to track changes in total Russian services activity compared with one month previously. Readings above 50 signal growth of activity compared with the previous month, and below 50 contraction.

The Russia Services Business Activity Index fell for the first time in four months in December, from 54.8 to 53.8. The rate of expansion signalled was weaker than the average for 2011 as a whole (54.6) and the long-run survey trend (56.6). The Composite Output Index, covering both manufacturing and services, also eased on the month to 53.5.

The rate of services new business growth eased marginally from November's four-month high, and was broadly in line with the average for 2011 as a whole. Manufacturing new order growth also weakened during the month.

The strength of new business growth remained relatively weak in both sectors in December and, as such, the volume of outstanding work in manufacturing and services continued to fall. New business growth was, however, sufficient to generate higher employment. Both sectors posted rising headcounts, and the pace of expansion in services was the fastest since June.

Despite the improved degree of job creation in the services sector in the latest period, service providers were markedly less confident about the longer-term outlook for activity. The level of business expectations slumped sharply to its lowest since December 2008. Since the survey started in late-2001, sentiment in the Russian service sector has been weaker only during the final three months of 2008. December's weak outlook reflected firms' concerns over domestic political uncertainty and the global economic situation.

Price pressures in manufacturing and services remained moderate in December. The rates of input price inflation eased in both sectors, and were weak in the context of historic survey data. Similarly, output price inflation was muted compared with long-run survey averages in both cases.

Alexander Morozov, Chief Economist (Russia and CIS) at HSBC, commented "complementing the findings of the earlier Manufacturing PMI survey, HSBC's Russia Services PMI survey signals that the moderation of economic activity growth has spread to the service sector as well. The most astonishing thing is that service providers have reversed their business outlook from very bullish to very bearish in just seven months."

"While optimists still prevail, the last time business expectations were so low was amidst the economic crisis in December 2008. Indeed, global economic and local political news have not given much ground for optimism. At present, services companies are trying to continue 'business as usual' and keep expanding their workforces at one of the fastest rates during the post-crisis cycle. Yet, the current, still benign rate of economic activity expansion may be prone to an abrupt fall if current business expectations come true.

"By and large, the downside risks for economic growth in Russia are mounting."

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