Russia's industrial output in May increased by 0.7% y/y, continuing the modest positive trend seen in April when the indicator gained 0.5% y/y, according to data of the Rosstat state statistics bureau published on June 16. In m/m seasonally adjusted terms, the holiday-packed month of May saw a 0.3% slip in output.

After a moderate deterioration of output and overall sluggish recovery seen in March, May and April show a slight rebound of output, which is in line with improved outlook on Russia's faster transition from recession to slight growth.

In January-May, industrial output already beat the Ministry of Economic Development's expectation of zero growth for 2016 overall, posting 0.1% y/y increase and rebounding from 0.6% y/y decline seen previously in the first quarter.

The 0.7% y/y output growth figure was in line with UralSib Capital's expectations, while consensus forecasts compiled by Interfax and Bloomberg had both expected 0.8% y/y growth.

Notably, manufacturing gains continued after posting y/y growth for the first time in over 15 months in April. In May, the sector inched up by 0.3% y/y versus 0.6% y/y seen in April.

Meanwhile, the main driver of industrial output growth in May was the utilities segment: growth in utilities accelerated to 2.1% y/y from a 4% y/y drop in April, bringing the sector to 0.1% y/y growth in January-March overall.

First-quarter GDP data confirmed

On June 15, Rosstat confirmed a surprise 1.2% y/y contraction of GDP for January-March which strongly beat official and analysts' expectations and shifted the consensus to the economy bottoming out.

The supply-side GDP breakdown showed that both extraction and manufacturing improved in the reporting quarter. Extraction (accounting for more than 10% of GDP) accelerated to 2.1% growth y/y from 1.4% y/y in the previous quarter, and manufacturing (about 15% share in GDP) saw the contraction ease to 4% y/y from 6% y/y in the previous quarter.

"We believe that after the initial demand shock, manufacturing will gradually return to a moderate pace of growth in 2H16," UralSib Capital commented on June 16.

The bank expects moderate growth in domestically-oriented segments such as foods, machinery and equipment, and light industry, in addition to export-oriented sectors.

Sberbank CIB also expects to see improvements in the manufacturing sectors and forecasts y/y GDP growth to be in positive territory in the second quarter of 2016 already, "given the low base of 2Q15".

Help from interest rates around the corner

“The CBR has started to cut the key rate which will support lending activeness and consequently industrial production,” UralSib Capital adds, forecasting industrial production to grow 1.1% y/y this year.

Sberbank CIB also notes prospects for lower interest rates together with recovering domestic and investment demand to help return output to sustainable growth after “bottoming out in spring 2015 and being stuck at this level for the past year”.

Alfa Bank maintains a cautious stand and reminds that the structure of recovery is not broad-based: in the first-quarter GDP breakdown, only extraction and agriculture posted y/y growth of 3.7% and 2.4%, respectively.

“Important sectors, such as transportation and construction, contracted some 5% y/y, which suggests that the speed of the economic recovery will remain modest going forward,” Alfa's chief economist Natalia Orlova believes.

Recently another indicator, Russia's manufacturing Purchasing Managers Index (PMI), showed only a fractional contraction in May after falling to eight-month low in April, Markit, which compiles the index, said on June 1.

"With production levels returning to growth territory and job creation evident for the first time in 35 months, the overall downturn was only slight," the report reads.

In May, the PMI registered a four-month high of 49.6, up from April's 48.0. Although the figure was still below the 50.0 threshold indicating contraction, it was only marginal in the reporting month.

"The headline PMI has now pointed to a downturn in the sector in each of the past six months, yet the latest reading suggested that conditions were moving closer to stabilisation," Markit economist Samuel Agass commented.