Manufacturing Renews Contraction

Manufacturing contracted in October as companies cut jobs and failed to build up inventories, casting doubt on the strength of the recovery, VTB Capital’s Purchasing Managers’ Index showed Monday.

The index fell to 49.6 from 52 in September, the bank said. A reading below 50 signals contraction. The index had been rising month on month from a record low of 33.8 in December and returned to growth for the first time in 14 months in September. The bank surveys 300 purchasing executives.

“Acceleration in job shedding and inventory depletion” hurt output, said Dmitry Fedotkin, an economist at VTB Capital. New export orders had a “notable decline” while companies were hampered by a “strong rise in costs associated with metals, energy and oil-related items.”

Businesses are struggling to stay afloat as banks withhold credit and the export outlook remains uncertain. The Central Bank last week cut the refinancing rate to a record-low 9.5 percent to reduce the cost of bank loans. Gross domestic product shrank an annual 10.9 percent in the second quarter and 9.4 percent in the third.

 “We doubt that Russia’s GDP will resume growth without a continuing rise in exports,” Natalya Orlova, chief economist at Alfa Bank, said in an e-mailed report on Oct. 23. “Until the lack of investment is addressed, we believe there is a high risk that output will remain stagnant.”

While rising exports boosted sectors such as metals production, Russia in September posted annual declines in construction, capital investment, real disposable income and retail sales. The metals sector is close to reaching full capacity and may not expand further, Alfa Bank said.

“We believe the economic data are more indicative of stagnation,” Orlova said. “The government’s view is based on the recovery in export-focused sectors; however, domestic sources of growth are still fragile.”

The Central Bank’s rate cuts have failed to boost lending so far. Banks have continued to reduce the size of their loan books as they use their funds to repay emergency financing extended earlier by the Central Bank, Orlova said.

Companies have cut jobs to adjust to continued tight credit conditions and as they factor in the prospect of a slow recovery in export demand. The jobless rate remains “a clear challenge,” President Dmitry Medvedev said last month. Unemployment stood at 7.6 percent in September.

The International Monetary Fund is advising officials around the world not to withdraw economic stimulus programs too early. The risk of a double recession “is small, but it’s not impossible,” Dominique Strauss-Kahn, the organization’s managing director, said on Oct 23.