Russian Service Industries PMI Plunges to Record Low

Russian service industries ranging from banking and telecommunications to supermarkets shrank in November by the most on record as the global financial crisis deepened. The Purchasing Managers’ Index contracted for a second consecutive month to 37.2 from 47.4 in October, VTB Bank Europe said today in an e-mailed statement. A reading of 50 is the dividing line between expansion and contraction. VTB surveyed 300 purchasing managers at service companies.

“The services sector used to be the strongest pillar of economic growth,” said Vladimir Osakovsky, economist at UniCredit Bank in Moscow, in a note to investors. The numbers imply “considerable downside risks to broader real GDP growth.” .
Supermarkets and mobile phones retailers are slashing sales forecasts and firing staff, indicating consumers are set to rein in spending because of rising unemployment and wage arrears, Osakovsky said. Investors pulled $190 billion out of Russia since the start of August, BNP Paribas SA estimates, forcing the government to devise a $200 billion package to boost liquidity.

The contraction in service industries was “by far” the biggest since the survey began in October 2001, VTB said in the statement. “Activity, new business, employment and backlogs all registered much steeper contractions than in October.”

The benchmark Micex stock index was down 1.8 percent at 569.23 as of 11:37 a.m.. The ruble, which policy makers manage against a basket of dollars and euros, was at 27.9153 per dollar by 11 a.m. in Moscow, from 27.8993 yesterday. Against the euro, it traded at 35.4518 from 35.4720.

Gloom Ahead

Services globally are feeling the impact of the credit squeeze and loss of momentum in consumer spending. U.S. service industries probably contracted in November at the fastest pace on record, economists said before a report today. There were similar contractions in Spain, France and Italy, Reuters reported today.

Higher wages and increased employment sent ordinary Russians to shopping malls that sprang up during the recovery from the 1998 debt default and ruble devaluation. Retail sales, triggered by rising consumer borrowing, increased at an average annual rate of about 13 percent. Loans to individuals rose 58 percent last year, reaching 2.97 trillion rubles ($106 billion) on Jan.1.

Economic growth will slow to 3 percent next year from an average of 7 percent a year since 1999, the World Bank predicts, as the global credit squeeze blocks access to loans and erodes demand and investment. Prime Minister Vladimir Putin plans 550 billion rubles ($20 billion) of tax cuts to support businesses, in addition to a $200 billion package to boost liquidity amid the worst financial crisis since 1998.

‘Engine’ Failure

There may be a “rapid overall contraction in the services sector over the year ahead,” said Svetlana Aslanova, senior corporate analyst at VTB Bank Europe Research, in the report.

X5 Retail Group NV, the largest supermarket chain, will halve its investment budget for next year to $500 million. Sales growth will slow to about 25 percent in 2009, X5 said on Dec. 1, compared with 40 percent expected this year. The company will cut as many as 30 percent of jobs at its central Moscow headquarters to reduce costs, investor-relations head Anna Kareva said on Oct. 30.

A 33 percent jump in wage arrears in October and rising unemployment will put the breaks on Russian consumption, the “main engine” of Russian economic growth, Alfa bank economist Natalya Orlova said in a report on Nov. 20.

The seasonally adjusted services PMI is a composite of five differently weighted indexes including business, employment and new, outstanding and future business, according to VTB.

Source: bloomberg.com

Publication date: 12/3/2008

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