IP surprised on the downside, posting a mere 0.4% YoY increase in June after several months of solid gains (2.2% on average in February-May).
The sudden slowdown in manufacturing (to just 0.3% YoY) was the main drag, while growth across mining industries remained flat near 1% YoY throughout 1H14. Meanwhile, utilities’ output kept shrinking, dipping slightly deeper into the negative area (to -0.8%, from 0.5% a month ago).
Manufacturing ended 2Q14 on a soft note, normalising after two months of abnormal growth as the impact from one-off factors ended and the fundamentals of softening local demand and lacklustre export orders took hold. As for the one-offs, the unusual strength in oil processing faded in June and the output of bulky machinery items likely also dropped. Also of note, the reality of weakening consumer discretionary spending has finally dawned on car producers which, for some reason, had been building up inventories over the previous several months (cars output printed a decline of 0.5% YoY vs. the 5.9% increase in May). As suggested by the slowdown in the output of building materials, the underlying growth momentum in manufacturing must have softened as well, but not as sharply as flagged by the headline number, especially as trade-restrictions-driven import substitution (in food, steel and transport machinery) is continuing. Looking ahead, we believe IP is likely to maintain a tepid pace of growth (0.5–1.0%), with the economy running at a below-trend pace for the rest of 2014.
Policy-wise, the report is fairly neutral as the CBR cares little for growth as long as inflation remains elevated.
Vladimir Kolychev, Daria Isakova
VTB Capital analyst
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