Russias Manufacturing Sector Faces Sharp Decline Amid Weak Demand and Inflation Concerns

According to the latest figures from S&P Global, Russia’s manufacturing sector experienced its most significant decline in nearly three years last month, driven by waning domestic and export demand, which resulted in decreased output and fewer new orders.

The Purchasing Managers’ Index (PMI) for Russian manufacturing dropped to 48.2 in March, a decrease from 50.2 in February, marking its second consecutive month of weak results following a relatively robust score of 53.1 in January.

The Russian Central Bank has been forecasting a significant economic slowdown since August 2024, as it began implementing non-monetary policy measures to cool down an overheated economy and address persistent inflation, which reached 9.9% in January.

The fall in the PMI indicated a renewed worsening of operational conditions, representing the sharpest decline since April 2022 and the first reduction since September of the previous year.

However, analysts at Renaissance Capital noted that inflation likely peaked in January and may begin to decrease moving forward. Nevertheless, they warned that the extremely high interest rates, currently at 21%, are unlikely to be reduced anytime soon.

The sluggish performance in manufacturing reflects trends in both the service sector and the overall PMI results. In February 2025, Russia’s services sector also showed a marked slowdown in growth, with the S&P Global Russia Services PMI declining to 50.5 from January’s 54.6.

Simultaneously, the composite PMI, which aggregates manufacturing and services data, fell to 50.4 in February from January’s highest mark of 54.7. New data for services and the combined PMI are expected to be released later this week, likely revealing similar declines below the crucial 50 threshold.

The contraction was primarily driven by a significant drop in production, ending a four-month period of expansion. S&P Global highlighted that the reduction in output was the steepest since July 2022.

This downturn was linked to falling demand, with new orders decreasing for the first time since October 2023. Export sales also diminished, exacerbating the decline in total new business.

In response, manufacturers decreased their input purchases, opting to utilize existing inventories.

“Soft client demand led to a further reduction in input buying during March,” the report stated, emphasizing that “the drop in purchasing activity was the most pronounced since August 2022.”

Additionally, firms faced challenges in restocking their inventories, and while some supply chain pressures lessened slightly, delays related to logistics and rail transport continued to impact delivery times.

As Rencap anticipated, inflationary pressures eased over the month, aided by favorable exchange rate shifts that helped stabilize the cost of imported goods.

“Input costs increased at a historically low pace,” with the latest rise being the mildest since December 2022. Although output prices continued to rise, the rate of selling price inflation was the slowest in two years and fell below the historical average.

While the Central Bank strives to achieve a soft landing for the economy, there are predictions of a wave of bankruptcies later this year, although some analysts believe that Russia’s economy is more resilient than it may seem.

The PMI indices will serve as a useful indicator of how effectively the Central Bank and Finance Ministry are navigating the enforced economic slowdown to address inflation.

A positive indicator of the authorities’ effective management thus far is the improvement in business confidence, encouraged by expectations of stronger future output backed by investments in product development and marketing.

“The level of positive sentiment was pronounced and the highest in four months,” the survey noted. This optimistic outlook resulted in modest hiring, with employment increasing at the second-fastest rate since August 2024, although job creation remained limited.

Unfilled orders declined at an accelerated rate, reflecting an increase in workforce alongside reduced order volumes. The drop in outstanding business was the joint-highest since February 2024.

Overall, the data highlights increasing pressures on Russia’s industrial economy, as muted demand and logistical challenges weigh on performance, despite some optimism and easing cost pressures.

This article was originally published in bne IntelliNews.