According to Rosstat, IP growth declined 0.7% YoY in July, bringing the YTD growth to zero in annual terms. This came below Bloomberg expectations of a 0.2% YoY decline and a notch above our downbeat forecast of -0.8% YoY. SA IP dropped 0.9% MoM, on the official estimate.
The key drag on IP growth was continuously shrinking manufacturing output, which dropped 1.5% YoY with metal output contracting (followed a bounce back in June) and a deep drop in trucks production (-18.9% YoY), while growth in the production of construction-related materials recovered.
The mining sector remained the key support for IP growth, but the pace of its growth cooled to 0.4% YoY on a greater YoY contraction in coal (despite the recovery in gas output).
Furthermore, the drop in utilities worsened to a 1.8% YoY decrease (from -0.8% YoY in a month ago).
Although the difference between the reported and expected IP decline was moderate, we treat the recent print as worrisome as the deterioration in industrial production in Russia is intensifying. Taking into account the additional working day this July (vs. July 2012), we had expected stronger IP data. However, in reality an opposite move occurred: last month WDA YoY growth in IP was the worst print since October 2009, dropping 1.1%, mainly due to the decline in manufacturing. Furthermore, metals output contracted again after a short-lived relief in June, indicating still fragile external demand, which is coupled with weak internal demand.
Overall, the latest IP report is cause for concern, highlighting the cyclical slowdown in the economy that need to be addressed by cyclical stimulus. Coupled with the lack of positive surprises in the economic statistics for July (full data is due next week), that will likely underline the necessity of monetary policy easing and push the regulator to opt for a more decisive easing move on 13 September (especially if annual inflation slides tightly to 6.0% by the time of policy meeting, as we predict).