The robust IP reading in October follows a string of positive surprises (3Q GDP, IP in September) on the supply side of the economy and generally suggests that growth is continuing to rebalance, away from private domestic demand towards net exports. In terms of the components, we find the strength in mining output rather puzzling amid the double-digit decline in gas production (-11.4% YoY), but in any case the main upside surprise came from the sustained pickup in manufacturing. The final industry details are to be released later this week but, based on the published subset of output statistics as well as anecdotal evidence, we attribute this surprising strength to the following factors:
We think that the impact from one-offs might have been particularly pronounced in October, although the underlying growth in manufacturing on the back of the first four factors must nevertheless have been decent. Looking ahead, we think that the support from restrictions-driven import substitution as well as housing construction will start to dissipate into 2015, while both military spending and pipeline construction are likely to continue supporting some parts of the manufacturing sector. We expect this to cushion the impact from deep cutbacks in consumption (-3.0%) and private investment, but a mild recession next year (-1.0%) looks hard to escape.