Manufacturing output dynamic still lacks distinction

According to the data of the Central Statistical Bureau (CSB), the amount of manufacturing production in January 2015 dropped 0.2% month-on-month (seasonal factors excluded). Year-on-year, output grew by  2.0%, but it has to be taken into account that at the beginning of last year there was a very big drop in manufacturing output because of problems in the metals sector.

In January,  the greatest month-on-month contribution to growth was provided by the wood industry (+2.2% month-on-month, seasonal factors excluded, it is a new record high), wearing apparel production (+24.9%; yet the year-on-year rate remained  expressly negative at -8.1%), food production (+1.2%; year-on-year growth rate negative: -3.8%), output of fabricated metal products (+6.7%), as well as the production of computers, electronic and optical equipment (+12.3%; recently, the real indicators of the sector seem to be slightly overvalued: the year-on-year growth of 135.1%, which is substantially lower nominally, in all likelihood points to some methodological problems in data accounting). Meanwhile, the month-on-month growth was adversely affected by the drop in volumes in the metals sector (-40.5%) and the production of power equipment (-11.3%) and mechanisms (-13.1%). The performance of the latter two sectors was in all likelihood affected by the weakening of the Russian economy. The substantial drop in output of the energy sector also deserves mention (18.4% month-on-month, 19.0% year-on-year) – it apparently resulted from the untypically warm weather conditions.  According to the CSB data, the average air temperature this January was -0.7°C, whereas a year ago it was -6.1°C, and that apparently determined the unsuccessful performance of the energy sector in that month.

At the moment, manufacturing is a sector of contrasts in a sense. There are sub-branches that have recently demonstrated very high growth rates (production of electronic equipment, production of furniture and wood industry), but there are also sub-branches with serious problems (the production of wearing apparel and textiles, production of power equipment and, to a lesser extent, the food industry). The situation in manufacturing was of course exacerbated by the geopolitical developments and, as a result, the sub-branches that have been traditionally oriented towards the markets of Russia, Ukraine or other CIS countries are currently demonstrating substantially weaker results than those branches whose diversification in terms of markets and products is more developed. Up to now, the real amounts of manufacturing output (i.e. excluding the price effect) have not dropped substantially as a result of economic sanctions or because of the weakening of the Russian economy, yet a certain amount of output stagnation has been observed.  That does not apply to the nominal indicators: the sales of manufacturing output for actual prices have been contracting gradually since September. This is the result of two effects. One is the price effect – in order to continue to sell their products, manufacturers are forced to lower the sales prices.  The other is the stock effect – one of the sub-components of the European Commission's industry confidence indicator is the evaluation of stocks, which has increased substantially in recent months and indicates that overproduction is forming in some industrial enterprises.

Yet there is also some positive news. Today is the day of the official and solemn opening of  "KVV Liepājas metalurgs" production unit. Albeit there is still concern about the potential of the enterprise to achieve immediate success because of the situation in the global metals market, the fact that the enterprise is resuming its work even at a partial production capacity is very positive – not least, from the social and regional point of view.

The latest macroeconomic data from the euro area give grounds for moderate optimism: growth in the last quarter of 2014 was slightly faster than expected; moreover, at the beginning of this year, some economic sentiment indicators improved substantially, which may indicate acceleration in economic growth as early as this year. A partial reason for the improved sentiment can be explained by the monetary policy decisions of the ECB Council, which means that credit availability and rates will become even more advantageous. Another piece of good news is the fact that in 2014 the non-financial investment amount grew  21.2% year-on-year. That gives rise to a hope that in 2015, as these investment projects are carried out, their results will present themselves also in the manufacturing output data.  Assuming that no new geopolitical shocks are to be expected, manufacturing may return on the track of gradual growth in  2015.