Rosstat estimates that IP edged higher to -4.8% YoY in June, after the -5.5% YoY a month earlier. The print is weaker than the Bloomberg-compiled consensus of -4.0% YoY.
The improvement came principally on the back of the slowing decline in manufacturing, which bounced back from -8.3% YoY in May to -6.6% in June. Utilities improved marginally, from -1.4% YoY to -1% YoY, while mining industries were stuck at -0.9% YoY.
The most noticeable feature of the report is the rebound in manufacturing, which is a mixture of technical factors and a genuine pick-up in select sectors.
On the one hand, June this year had two additional working days, thus explaining a pickup of up to 10.5% YoY in industries with a non-continuous cycle. Furthermore, June 2014 provided a rather low base as manufacturing activity started to trend lower a year ago.
On the other hand, a moderate pick up can be observed in industries that have previously demonstrated a significant correction. First, the manufacturing of non-basic food items is on the rise (i.e. juices were up 23.4% YoY after a drop of 15.0% YoY in the previous month). Second, light industries are showing signs of recovery, with the drop in knitwear improving to 4.6% YoY, from 37.5% YoY a month earlier, and the slide in shoe manufacturing slowing to 12.7% YoY, after 18.1% YoY. Third, the decline in car manufacturing improved to 17.2% YoY, after the 37.1% YoY before. We expect industrial production to recovery gradually as the contraction in manufacturing decelerates further, especially in retail non-food items, select construction materials and further growth in food manufacturing, chemical industry.
In terms of policy, this report brings more evidence of supply side weakness in the economy with only a handful of green shoots (and their existence is often subject to debate, as to what extent they are the result of technical factors, one-off statistical noise or a genuine improvement in output). Thus, the report is in our view supportive for a further normalisation in interest rates at the CBR’s next BoD meeting, which we expect to deliver a 50bp cut in the key rate.