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Services PMI in August points to cost pressures and fragile growth in the sector

In August, the Russian Services PMI rebounded to 52.6, from 52.0 in July. The detailed breakdown reveals that the incoming new business sub-index improved to 51.1, from 50.3. In August, the employment sub-index decreased to 50.6, from 52.0 in the previous month (it has been see-sawing since March 2012).

Both the prices growth sub-indices advanced: input price growth jumped to 61.3, from 58.1, and returned to its long-term trend, while output prices accelerated to 54.4, from 53.8. Importantly, business expectations gained to 63.7, from the sharp decline to 60.8 in the previous month, although the sub-index is still below the 2012 average level.

The Services PMI data reflects the marginal improvement in the sector last month, but we see it as a correction after the abrupt decline in July, rather than the beginning of an upwards trend. We retain our forecast of lower growth in 2H12 due to tighter fiscal policy, higher inflation and cooling lending.

We believe the improvement in the incoming new business and business expectations sub-indices is still meagre, and see the negative mood on the global and domestic markets deteriorating this autumn owing to the lower oil price (our in-house view implies average Urals at USD 104/bbl in 2012, i.e. around USD 90/bbl for the rest of the year). At the same time, the employment sub-index showed a saw-tooth performance.

Besides, the inflation dynamic is surging, especially on the cost side. It is mainly driven by the recent hikes in regulated tariffs (one on 1 July and another on 1 September), coupled with a tight labour market. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

PMI, Russia

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