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IP - strength in manufacturing carries on through October

The growth in industrial production remained surprisingly solid in October, at 2.9% YoY. Across the manufacturing and mining industries, it kept up a fairly decent pace in October (up 3.6% YoY and 1.9% YoY, respectively), while utilities output accelerated (from -0.8% YoY in September to 2.8% YoY in October) on the colder weather.

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:

  • Import substitution prompted by trade restrictions and a weaker RUB – as seen in the robust pickup in food processing.
  • Military spending on the rearmament programme – as seen in the surge of undisclosed output across transportation machinery.
  • Construction of Power of Siberia – pipes output surged 31% YoY in October.
  • The 'flight from RUB'-related spike in housing sales on a pre-financed basis and the subsequent pickup in housing construction and the demand for building materials.
  • Mix of one-offs, including a strange spike in oil processing (+6.6% YoY) and gas turbines (+90.8% YoY).

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.

Vladimir Kolychev
VTB Capital analyst

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