Russian industrial production has markedly decelerated following a strong spring. It came in at 1.1% y/y in July, paling against June's 3.5% y/y.

The slowdown affected all four sectors covered by the Rosstat report, but a more detailed study shows consumer goods output was on average more resilient than that of intermediate or investment items, VTB Capital (VTBC) reported.

Real incomes have been rising in the last few months and retail turnover has also returned to the black after years of decline, so rising consumption is starting to make itself felt in the economy, providing some mild support for growth.

Rosstat’s consumer confidence index has climbed steadily since its low in the first quarter of 2016, but it remains negative. The business confidence survey has also shown improvement since its low in December 2016 and it even went into positive territory briefly in June. However, business confidence clearly remains fragile. The index fell back to -1 in July.

Together these indicators can, however, overall be taken as evidencing some green shoots of recovery, but that recovery has yet to gather any real momentum.

 

It is not clear from the Rosstat report what caused the slowdown in industrial production. It could be just part of a summer deceleration as the spike to 5.6% in May was caused by Russians staying home more and consuming more electricity as a result of the foul weather that plagued the month.

“The current report suggests that the reason is the expiry of select demand support public programmes in machinery manufacturing and the absence of completions of 'chunky' machinery items with longer production cycles. The data implies that 3Q17 growth is likely to be slower than the brisk 2Q17, thus soothing concerns over demand side pressure on prices,” VTBC said in a note.

The manufacturing PMI for Russia is also pointing to a recovery and is foward looking, underscoring the expectation of an ongoing recovery taking hold. But this index has also slowed in the past few months. And services are doing a lot better than manufacturing, which also suggests consumption is playing an increasingly important role that is bolstering growth. 

Finally, despite the less robust growth in industrial production in July, it is at least broad-based and growing in all eight of Russia's federal districts.

VTBC went on to give the following details in its note:

Mining and quarrying continues its expansion streak. The segment added 5.0% y/y (vs. 5.2% y/y in July). Overall output volume has remained stable or improving throughout the recent recession. Natural gas extraction grew most, by 18.2% y/y (vs. 25.2%) on the back of export demand. Coal production also gained in July and expanded 7.8% y/y and is likely to grow in importance this year.

Manufacturing output contracts: consumer items more resilient, investment-related more exposed. The previous month’s growth of 2.9% y/y is followed by a -0.8% y/y decline. The Machinery & equipment category continued to underperform after a brief spike in mid-2Q17, which was helped by the public purchases programme. In particular, output of trucks declined by almost 20% y/y, while manufacturing of buses declined even more steeply.

Construction-related manufacturing remains chronically weak. Cement, clay and building bricks’ output have declined roughly by -3% each. The performance might be related to weaker construction activity associated with the base effect created by completion of projects related to the upcoming FIFA World Cup 2018 and may turn the corner later into the year.

Consumer-oriented goods were more resilient. Passenger cars output rose from 16.9% y/y to 19.7%. The strength benefited from a more optimistic consumer outlook, easier access to borrowing, real wage growth, and demand for cars created by the stimulus package, launched on 1 July.

Electricity & gas production has also slowed slightly. Output growth of the sector has shrunk from 0.6% y/y a month ago to 0.1%. The decline in the hydro electricity generation growth (to just 1.7% y/y) has been partly offset by the pick-up in the nuclear power plant electricity generation.