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Industrial production – down 0.4% YoY in 1Q15

 
16.04.2015

The headline IP index printed -0.6% YoY in March, a whole 1 pp stronger than in February. Rosstat’s figure overshot Bloomberg consensus of -1.9% and our estimate.

Component-wise in March, mining growth was again marginally positive at 0.4 YoY (vs. 0.1 YoY in February), the manufacturing decline slowed from -2.8% YoY to -1.9%, while electricity and heat production edged higher to 0.8% YoY (vs. -1.7% in February).

The state of the mining industry is qualitatively unchanged with positive contributions from oil (+0.9%) and coal (+3.6%) output being offset by the 5.2% YoY decline in natural gas production, keeping the headline figure at +0.4%. Utilities output was up due to the normalisation of weather conditions, which in March were in line with the previous year’s level. This led to heating output being back to -0.5% YoY compared to -7.9% YoY in February.

The manufacturing output contribution remains negative, while its decline moderated to -1.9% YoY. Component-wise, the production of machinery (including railway wagons) and electrical equipment continued to decline in March. Meanwhile, import substitution in food and beverages was again on the rise. Manufacturing output was also supported by a number of one-off spikes in steel-making equipment, locomotives and devices for measuring liquids production, which are likely to reverse in the coming months.

On the whole, the current print underscores the weak demand/resilient supply dichotomy characteristic of the current recession. We expect that weaker currency and temporary factors (including homebuilding, pipeline infrastructure and faster (and larger) budget allocations in defence) continue to lend support to industrial production, leading to a milder contraction compared to the 2008-09 recession.

Policy-wise, declining industrial production provides additional evidence of increasing slack in the economy. Although the contraction is still mild, tight credit conditions, deleveraging in corporate and household sectors and declining demand are set to provide increasingly downward pressure, which in combination with anti-inflationary fiscal policy, will curb consumption and anchor cost inflation in the private sector.

Vladimir Kolychev, Alexander Isakov
VTB Capital analysts

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