HSBC Russian services PMI shows Services boost in July

The HSBC July Russian Service Business Activity Index rose slightly in July to 56.9, from 55.1 the previous month in contrast to the contraction of manufacturing output.

The July Services index rate of growth has outperformed for the second time in 11 months supported by gains in new business.  Improved productivity and spare business capacity saw Russian service providers also reduced their levels of outstanding orders, and increase employment rates for the ninth month in a row in July. The pick up in services and slow down in manufacturing had a minimal effect on input price inflation in both sectors with services charged prices up marginally while manufacturing output prices moderated to a 12-month lowAlexander Morozov, Chief Economist (Russia and CIS) at HSBC, said services drove Russian economic growth in July with the service and manufacturing sectors diverging, and the former increasingly driving the Russian economy.  But Morozov also warned of the risks this entails in the face of a volatile global outlook. “Once more, faster output growth in the service sector has more that offset the weakening of manufacturing growth, pushing up overall economic growth in Russia in July, the HSBC Russia PMI report says. Thereby, the diversion in dynamics of the service sector and manufacturing that emerged a few months ago has further widened in July. In essence, domestic consumer demand has become the key and the only growth driver in Russia. There would be nothing wrong in this growth model in an environment of stable global economic outlook and steady exports growth. Yet, high commodity prices, sovereign debt problems in the Eurozone and the US, and policy tightening in China weighs negatively on the global economy while Russian exports stagnate. Therefore, expecting output growth in the service sector to keep getting momentum for some time providing further boost to GDP growth, we believe that economic growth in Russia will moderate in two or three quarters from now toward its potential rate of about 3%, on our estimate.”Morozov added that the survey was showing increasing price pressure which could intensify during 2H 2011.“Importantly, stronger growth in the service sector has intensified cost pressures in the economy and pushed up output prices too. This points to a likely reversal of the recent inflation moderation trend, although it is worth waiting for another month or too before this finding can be validated. Interestingly, the composition of cost growth drivers has changed this time. Higher energy, fuel and transportation costs used to be the key drivers of cost pressures in the service sector, but were not widely reported as factors in July. Instead, the intensification of cost pressures – according to anecdotal evidence provided by companies – comes from higher wages, marketing, renting and telecommunication costs.”