Activity across Russian manufacturing industries continued to decline in April, according to the latest PMI survey, but the pace of the contraction remained stable with the headline index almost flat to the 1Q14 average (48.5 vs. 48.3 on average in January-March).
The output sub-index posted a slight upturn to 49.1 (vs. 48.1), but remained underwater with investment-related industries suffering the most. The rate of decline in new orders, both local and export, moderated, with the respective sub-indices inching up to 48.2 and 46.0, respectively. Meanwhile, the employment sub-index edged up to 48.0, but remained below the waterline, pointing to continued cost optimisation efforts.
The inflationary impact of a weaker rouble continued to propagate through the economy, as the pass-through from cost inflation, which actually eased somewhat (to 65.7), into output prices (57.2) strengthened.
April’s PMI report shows that Russian manufacturers continue to scale down production in response to meagre order inflows (both domestic and export). Thus, the broad picture was pretty similar to what we saw in 1Q14 and, as suggested by the historically depressed (and sliding) orders-to-inventory ratio, there is little reason to expect a turnaround in the near term. Hence, it is not surprising that corporates continued to reduce their headcount.
Meanwhile, the pass-through from a weaker rouble crystallised into a pick-up in output prices, which is also reflected in the advance in consumer prices (CPI). We note that input price inflation has nevertheless stabilised, which is likely to herald a normalisation in cost pressures over the coming months, unless there are new shocks (for instance, harvest).
In a nutshell, we expect a technical recession in 1H14 and a stagnant FY14 GDP, acknowledging that the risks are tilted to the downside.