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Russian manufacturing growth accelerates in July

Manufacturers’ Purchasing Managers’ Index points to continued expansion despite continued high interest rates

Further confirmation that the Russian economy is now in a condition of steady growth came from the latest survey by IHS Markit, which showed manufacturing PMI (Purchasing Managers’ Index) in July rising to a six month high of 52.7.

To those unfamiliar with the concept of PMI here is how IHS Markit explains it

PMI data are based on monthly surveys of carefully selected companies. These provide an advance indication of what is really happening in the private sector economy by tracking variables such as output, new orders, stock levels, employment and prices across the manufacturing, construction, retail and service sectors.

The PMI surveys are based on fact, not opinion, and are among the first indicators of economic conditions published each month. The data are collected using identical methods in all countries so that international comparisons may be made.

PMI surveys have a very good record of showing the true situation in an economy.  An indicator below 50 points to contraction; one above 50 indicates growth.  Russia’s manufacturing PMI has been consistently above 50 throughout this year.

At this point it is once again worth adding that Russia is achieving positive manufacturing PMI at a time when the Central Bank’s key rate is still 9% and real interest rates are around 5%.  I say this because despite a short upward blip in June and July in the annualised inflation rate to 4.4%, even the ultra-hawkish Central Bank admits that this was entirely due to seasonal factors and that the underlying inflationary trend remains firmly downwards.

 June saw a slight short-term rise in inflation to 4.4%, which came as a result of price movements in fruit and vegetables under the influence of bad weather conditions. At the same time, the trend towards sustainably low inflation remains in place. Growth rates of food product prices, but for fruit and vegetables, continued to slow, so did prices in the non-food product market and core inflation. Price growth rates continue to show consistency both across regions and in the consumer basket. This is reflected in the growing proportion of products and services posting price growth rates around 4%. In this environment, recovering consumer demand alongside the decline of its disinflationary effect brings no material risks. In the months ahead, as new harvest comes in, prices for fruit and vegetables are set to show a seasonal downward trend.

Given the very high real interest rates manufacturing growth of this strength in Russia is surprising, and is well above expectations.

There are now some suggestions that GDP growth in Russia in May may have been as high as 3.5%, and this is already causing some people to predict overall GDP growth this year of as high as 2-3%.

This is almost certainly too high given the tough monetary conditions, but there remains an outside possibility that Russia could recover this year nearly all the output it lost during the two year recession which has now definitely ended.

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