According to Rosstat, industrial production growth slowed to 2.0% YoY in March, from 6.5% YoY in February. This is significantly below the consensus forecasts of 5.4% YoY (Interfax) and 5.0% (Bloomberg), as well as our expectations of 5.5% YoY. Seasonally adjusted industrial production declined 1.2% MoM. In 1Q12, IP added 4% YoY.
The detailed breakdown reveals that the growth in manufacturing dropped to 2.4% YoY in March from 6.3% YoY in the previous month. Mining added only 0.8% YoY in March, compared with the 3.7% YoY increase in February. Growth in the utilities sector slowed to 1.3% YoY last month, from an exceptional jump in February to 6.7% YoY.
The drop in industrial production growth in March was partly driven by the high base effect (IP increased 11.7% MoM in March 2011) and coincided with both the moderation in railway cargo turnover and the weak Manufacturing PMI in 1Q12. IP growth has been on a slowing trend since May 2010. This, in our view, highlights the necessity of supply side reforms to policymakers.
The poor industrial production performance might also imply a deceleration in fixed capital investment growth in March, after the strong growth in 2mo12 (above 15% YoY). This bodes well for our end-year GDP forecast of 3.5% YoY.
In terms of the CBR’s interest rate decision, the authorities might again be concerned about weaker IP. However, we expect the CBR to keep policy rates on hold in 1H12 given the uncertainty and upside inflation risks in 2H12.