Russia's industrial output continues slow but confident recovery in June

Russia's industrial output continues slow but confident recovery in June
Russia's industrial production was unexpectedly strong in June
By bne IntelliNews July 18, 2016

Russia's industrial output put in  unexpected ahead of consensus growth in June,  increasing by 1.7% y/y and 0.3% m/m in seasonal and calendar adjusted terms, according to a Rosstat report published on July 14.

June extended previously seen y/y growth rate recovery of the output to the third consecutive month, with industry gaining 1% y/y in the second-quarter compared with 0.6% decline seen in the first quarter of 2016.

Industrial activity was whalloped by the collapse of oil prices at the end of 2014 and subsequent devaluation, but as widely expected the Russia economy should return to growth in the second half of this year. 

The growth beat the Reuters consensus expectation of 0.6% y/y growth in June and the Ministry of Economic Development's forecast of 0.3% y/y growth.

Industrial output in the first half of 2016 inched up by 0.4% y/y versus 2.7% y/y decline seen in the same period of last year. This is broadly in line with the ministry's forecast of industrial output growth of 0.5-1% for 2016 overall, revised recently from zero growth on positive developments seen in spring.

“Industrial output growth has been moderate in y/y terms so far in 2016 and could be close to 1% for the year,” Sberbank CIB commented n July 18. BCSE Equity on the same date estimated that the indicator for 2016 overall could reach 0.7% y/y.  

Most notably, manufacturing output growth continued to strengthen in June, posting 1.6% y/y growth versus 0.3% y/y seen in May and making the fastest monthly y/y rate in two years.

The recovery in manufacturing put the second-quarter gain in the sector to 0.9% y/y and 9% q/q, beating first-quarter 13.1% y/y and 19.7% q/q drop.

Extraction growth remained stable in June at 1.6% y/y, almost unchanged from 1.5% and 1.7% seen in May and April, respectively, while utilities' output remained flat y/y in June.

Sberbank sees import substitution and a moderate recovery in investment demand as the main growth drivers in the manufacturing sector, with the food industry being the main benefactor from ruble depreciation in terms of output. But textiles, clothing, footwear, and production of pulp and wood also gained.

BSC Equity notes that June's data showed modest growth in construction material output, feeding positive expectations for the construction and the housing sector, while the worst performing sector remained light commercial vehicle (LCV) manufacturing.

“We would also like to point out the growth in the output of tractors (15.6% y-o-y in 1H16) and trucks (4.4%), which may point to an improvement in investment,” Sberbank CIB notes, reiterating its generally positive views that the Russian economy will see a moderate upturn in the second half of the year.

Manufacturing Purchasing Managers' Index data published by Markit on July 1 also showed a strengthening upturn in the manufacturing sector June, with the PMI index scoring 51.5, above the 50.0 no-change threshold and the highest since November 2014.

In seasonally adjusted terms, business confidence indicators also improved in June, in line with the recently reported modest pick-up in industrial activity in spring 2016 and anticipation that lower interest rates by the central bank will support output.

Positive first-quarter GDP and income figures, as well as a rebound in industrial output in May and April reinforced the widely held belief that Russia will transition from recession to slight growth later this year – hopes that just received a fillip from the CBR, after it cut overnight rates to 10.5% in June after a break of almost one-year.  

The usually more conservative Alfa Bank also welcomed the “strong improvement” of the industrial output in June, beating the bank's 0.5% y/y growth expectations.

“At the same time, the above forecast IP result is not a guarantee that the June’s macro statistic will also beat expectations,” Alfa's chief economist Natalia Orlova warns, reminding that preliminary lending figures suggest that in June the corporate loan book continued contracting, by 0.5% m/m, leaving the improvement trend fragile.  

Meanwhile, BCS Equity said June's results were as expected, given the low y/y comparison base and stabilisation of output in the previous month. Unlike Alfa, BCS believes that the remaining economic indicators will follow the output figures in the coming one to two months.