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IP: unexpected rebound in December


Growth in industrial production bounced back to a fairly solid 3.9% YoY in December. A rebound across manufacturing industries amid a continuing decent growth pace in the mining sectors (+4.1% YoY and 3.0% YoY, respectively) were the main drivers, while utilities output slowed (from +7.0% YoY to 3.4% YoY) on warmer weather conditions.

On a general note, the robust IP reading in December suggests that the rebalancing of growth away from private domestic demand and toward net exports is continuing. Component-wise, we find the strength in mining output puzzling amid declining oil and gas production (-0.6% YoY and -5.3% YoY, respectively), but in any case the main upside surprise came from the solid rebound in manufacturing (up 4.1% YoY after a 3.0% slump in November).

Final industry details are yet to be released (later this week), but based on the published subset of output statistics, as well as anecdotal evidence, we suggest that this surprising strength is due to the following factors:

Import substitution prompted by trade restrictions and a weaker RUB – as seen in a robust pickup in food processing;

Military spending on the rearmament programme, as seen in a surge of undisclosed output across transportation machinery.

Construction of the Power of Siberia pipeline, with pipes output surging to 39% YoY in October;

'Flight-from-RUB'-related spike in housing sales on a pre-financed basis and the consequent pickup of housing construction and demand for building materials;

'Flight-from-RUB'-related spike in durable consumer spending and the consequent pickup of related industries (white goods, passenger cars);

Mix of one-offs, including a huge spike in gas turbines (up threefold in December).

We believe that the impact from one-offs might have been particularly pronounced in December – although underlying growth in manufacturing on the back of the first five factors must have nevertheless been decent.

Looking ahead, we expect a significant decline in activity, as the effect from most of the temporary factors soon fade away, while military spending and pipeline construction can hardly offset the negative spillover from a sharp contraction in domestic demand on manufacturing industries

Vladimir Kolychev
VTB Capital analysts


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