Russia's industrial output in November unexpectedly dropped by 3.6% year-on-year and 1.4% in adjusted month-on-month terms, showing the fastest monthly decline since October 2009, December 15 report by Rosstat statistics agency showed.

Analysts surveyed by Reuters expected the indicator to go up by 0.2% and the surprise under-performance for the second month in a row, together with weak third-quarter GDP numbers, casts a shadow on government's GDP growth target of 2.1% for 2017.

In November the industry showed decline in across all segments, with 1% contraction in extraction, decline in utilities of 6.4%, and most notably 4.7% decline in manufacturing that was previously recovering throughout 2017.

Overall in 2017 the consensus expectation for industrial output was 1.4% growth, but so far in eleven months of 2017 the indicator gained only 1.2%, mostly due to strong performance in the second quarter. Official government's forecast for industrial output growth this year is 2%.

Analysts surveyed by Vedomosti daily believe that while extraction continued to be suppressed by the Opec+ output cuts, manufacturers could have suspended their activity due to the uncertainty of the upcoming 2018 presidential election and possible tax reforms.
 
"Business is waiting for the election year to be over," billionaire and head of Norilsk Nickel metals major Vladimir Potanin said in an interview to Vedomosti on November 28. "Even with a strong presidential candidate the system freezes and there is a drive to postpone decisions to after the elections," he added.

"The current report sees the decline mainly coming from the metals and machinery & equipment category," VTB Capital commented on December 18, which might confirm a pause in investment activity.

The recent surprise decision of the Central Bank of Russia (CBR) to cut the key interest rate by 50bp to 7.75% could have been provoked by weak output dynamics in November, other analysts suggested to Reuters, seeing the measure as justified.

The industrial output report for November also calls into question the reliability of short-term indicators, as previously Markit's PMI and business confidence surveys pointed to improvement in the reporting month.

However, most of the negative effect in the reporting month could also be attributed to base effect as in November 2016 industrial output jumped by 3.4% y/y.

VTB Capital estimated that adjusted for base effects and seasonal variations industrial output in November 2017 would decline by 1.4% y/y, which would still imply in the second half of 2017 the indicator "was trending lower."

Alfa Bank also sees high base as contributing to negative industry results in November, but notes that previous concerns over weak results in construction and manufacturing in the third quarter were confirmed.

"As for December, we believe, that industrial production should return to a positive trajectory, albeit close to the zero level – we expect 0.5% y/y growth," Alfa estimated on December 18.