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IP contracted 1.4% YoY in May


According to Rosstat, IP growth plunged 1.4% YoY in May, the second lowest reading since the crisis. This came below Bloomberg expectations of 0.6% YoY growth and even our downbeat forecast of -0.8% YoY. SA industrial production dropped 0.6% MoM, on the official estimate.

The key drag on IP growth was shrinking manufacturing output, that dropped 4.4% YoY with output of cars declining a sharp 18.1% YoY (almost fourfold the -4.8% YoY in April) and growth in the production of construction-related materials deteriorating significantly. We note that this is the worst manufacturing output print since October 2009.

The mining sector remained the key driver, adding 2.3% YoY (the second strongest over the last 15 months). However, it is not as clear as in April why mining showed such good activity: gas output normalised to 1.1% YoY from a spike of 10% YoY in the month before, while other components did not progress substantially.

In addition, the growth in utilities almost completely stalled, to a 0.5% YoY increase (from 2.8% YoY in April).

As we have highlighted previously, the recovery in IP YoY growth in April-March turned out to be short-lived. And while the depth of May’s decline in industrial production growth is significantly due to the unbeneficial calendar factor, that cannot explain all the weakness: even adjusting for the number of working days, the annual expansion in manufacturing was still negative (-1.8% YoY WDA). This highlights the urgent need for economic stimuli to boost growth.

Furthermore, the intensified contraction in car production and the deceleration in construction-related output imply worsening local demand.

Hence, we treat the latest IP report as alarming. Coupled with what we expect to be downbeat economic statistics for May (full data due later this week), that will likely push the regulator to opt for a more decisive easing move as early as in July (especially given the recently started disinflation trend).

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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