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Russia continues to flirt with neutral growth

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The latest PMI figures for Russia fell to a four-month low of 50.6, though consumer goods sectors continues to grow at a slow pace

Purchasing Managers Indices (PMIs) are monthly surveys that gauge the performance and expectations of several indicators along the production logistics chain. They are useful leading indicators that can offer insight into the future performance of an economy as a whole.

The latest report shows that the output growth production remains unchanged after the slow growth seen in March. New orders continued to decelerate, posting the slowest growth rate since August. Consumer and intermediate goods posted a stronger growth than the investment goods sector, which actually contracted.

Deflation settling in

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Additionally, output prices contracted and the indicator is now at its lowest since June 2009. Prices fell across both the investment goods sector and intermediate goods sector, which points to a slow down in the sector and highlights the reduced demand. Consumer goods actually increased strongly, but were offset by the former two sectors.

Government unable to intervene effectively

Alexander Morozov, HSBC’s Chief Economist for Russia, said the following:

“The observed ‘two-speed’ growth dynamics in the Russian manufacturing complicates the monetary policy decisions, we think. In essence, only the investment goods sector may require a stimulus. But investment demand can hardly be pushed by monetary policy that sets short-term rates in the economy. Therefore, structural policies that improve business and investors’ confidence and willingness to invest should come to the frontline.”

Russia’s current situation is complex. The government’s monetary policies are tied up, which means only structural reforms would work, but that takes a much longer time to implement. In the meantime, the overall growth may remain sluggish given that Russia’s GDP is driven by industrial demand and not by consumer demand as in other more developed economies.

In the medium-term, there is no catalyst for improvement aside from global economic recovery, which is out of Russia’s government control. The market may continue to trade sideways at best for the rest of the year.

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