According to the PMI survey for January, the pace of the drop across Russian manufacturing industries deepened, with the headline index sliding to 48.0, the lowest since June 2009.
The output sub-index registered the sharpest fall, to 48.5, on a slump across investment-related industries, and a marginal contraction in the production of consumer-related goods.
Despite output cutbacks, outstanding business continued to fall at a relatively fast pace as the rate of decline in new orders accelerated while firms reported that lacklustre order inflows had freed up capacity. Meantime, labour shedding continued apace (admittedly, the pace of job cuts has moderated from multi-year lows), while input purchases dropped to the lowest since May 2009. Surprisingly, cost inflation edged down in January to 54.9 (normalising after a sharp upturn in December to 57.7) despite the weaker rouble, while the pass-through to final prices ticked up slightly (to 53.0), but overall remained historically muted.
Though details of the report suggest that Russian manufacturers have finally begun to align output with lacklustre order inflows (i.e. cut production), stocks of finished goods remained elevated and even expanded in January, as the pace of decline in incoming business surprised producers on the downside. Overall, the orders-to-stock ratio remains depressed (0.99 vs. the average of 1.12 in post-crisis period), suggesting further downside risks to the sort-term outlook for IP. Moreover, the survey also indicated that the investment-oriented sector has so far been the main drag on manufacturing, while household consumption has only started to moderate. We are concerned that consumption growth is set to soften sharply, putting additional pressure on producers. Hence, we do not expect any growth rebound in the coming quarters, and if anything see downside risks to our below-consensus growth outlook.