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July PMI manufacturing - pick-up in output is unlikely to be sustained

The headline index continued to pick up in July and reverted back to the positive area for the first time since October 2013. Most notably, the survey signalled a solid increase in output, which accelerated to the fastest over the last nine months, while new orders remained in moderate expansion territory, albeit export orders continued to contract.

We find this acceleration in output growth and new orders somewhat strange, as it contrasts sharply with both the hard data and anecdotal evidence. The survey suggests local demand has been picking up, which does not seem to be the case with subdued investments and a sharp slowdown in consumption. Even more strangely, the solid increase in output and continued decline in inventories suggests that there has been serious destocking, which is now reversing. Hard data, however, points to exactly the opposite: for instance, car sales have been declining at a double-digit pace, while car production remained resilient. Overall, this is further confirmation that PMI surveys do not always accurately reflect short-term fluctuations in output and are subject to substantial volatility. We reiterate that a sustained acceleration in manufacturing output is unlikely in the environment of a sharp slowdown in local demand and meagre export orders.

While we have our doubts about the upbeat sentiment over a production upturn and think it is likely to prove short-lived, it is clear that the inflationary impact from the weaker rouble has faded. Thus, both sub-indices (input and output prices) printed a significant decrease, normalising back to 2H13 levels. The vanishing FX pass through bodes well for our expectation of a turnaround in the inflation trend, although recent newsflow on trade restrictions and tax policy might delay, and contain the magnitude of, disinflation over the next 3-4 quarters.

Daria Isakova, Vladimir Kolychev
VTB Capital analyst


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