At the beginning of summer, the sun seemed to be shining on the production front, but not on new intakes, flows of which remained lacklustre. Hence, the latest data is unlikely to mark a reversal point just yet, in our view, and 3Q14 could well prove more challenging for producers than in previous months. Promisingly, after several exasperating months, inflation pressures eased in June, marking the return of a disinflation trend.
Demand-supply dichotomy cannot last long. One could conclude that PMIs being on the mend and the recent upturn in manufacturing output might signal a turning point. However, without an improvement in new order inflows, current production drivers are eventually likely to prove short-lived. The car sector might be the best example to illustrate this. According to RBC, car producers motivated dealers to build up extra stocks, which now exceed the normal level by 30%. Apparently on the conservative side on how quickly consumption will recover, we still reckon that lengthy weakness in demand for big-ticket items such as cars might result in an output adjustment over the rest of the year. All in all, as fundamentals remain meagre, a sustainable recovery seems unlikely, while import substitution, admittedly supportive, can only push IP growth to 1.0% for the year, we believe.