Manufacturing takes another step backwards

According to the information provided by the Central Statistical Bureau, the amount of manufacturing output in August dropped by 1.7% month-on-month (seasonally adjusted data at constant prices). Year-on-year, the amount of manufacturing amount increased by 2.8% (working-day adjusted data).

In manufacturing, this is the second consecutive month with dropping output amounts, which means that, in all likelihood, the entire third quarter will be in the minuses. That, in turn, indicates that there is no basis (also given the moderate retail data) to expect robust growth of gross domestic product in the third quarter (unless there are some positive surprises coming from construction or transport branch; so far, there are no signs of such an outcome, however).  

If we take a closer look at the entangled data of manufacturing branches, a rather unusual picture emerges. The positive year-on-year growth rate (+2.8%) is mostly explained by substantial increases in the so-called high technology branches – the manufacturing of computers, electronic and optical equipment (+37.6%), electrical equipment (+20.0%), equipment, mechanisms and work machinery (+16.7%), as well as automobiles, trailers and semi-trailers (+11.3%). Yes, one can say that output of these branches is unstable, yet, at the same time, their notable progress cannot be denied. If only a few years earlier the above branches accounted for only about 7-8% in total manufacturing structure, then lately it is 11-12%, and that is a positive piece of news.

Yet the novelty presented by this month is not the good results of the high tech branches but the negative growth rate of the wood industry (-0.8%). It is not much of a surprise – it was obvious in previous months that the growth rate of the branch is gradually slowing both as a result of the gradual disappearance of the positive effect of previously made investments and the deterioration of the global situation.

As could have been expected, food industry has returned to positive year-on-year growth rates. For a while, these will fluctuate around zero, but the recovery of the branch is becoming ever more evident.   After the very strong beginning of the year, August was a very weak month in terms of metal product output – in all likelihood it is related to the weakness of the local construction market, which in previous months was compensated in export markets.  The extremely weak performance of the energy branch should also be noted (-15.7%) – it was determined by the significantly smaller amount of electrical power produced in cogeneration (heat-electric generation plants) – yet here it has more to do with the base effect created by the uncharacteristically large amount of electrical energy created in August 2015. 

Do today's data tell us anything fundamentally new about manufacturing and its medium-term prospects? Hardly. The situation is better in some branches and worse in others yet overall the branch is continuing its growth. The turnover indicators of the branch enterprises are of some concern, for they indicate that sales lag behind production.

The industry confidence indicators are relatively good, and it suggests that entrepreneurs are not seeing their future in dark colours. The investment story looks worse, however. There have been no recent announcements of new, large-scale investment projects in manufacturing. Yes, one of the explanations is undoubtedly the interruption in the cycle of European funds, which has been felt not only by the construction branch but also by manufacturers. Yet the entrepreneurs surveyed admit that this is but a secondary reason: the primary reason for delaying investment is uncertainty, both on the global (Brexit, elections, geopolitics) and local scale (primarily concerning the possible changes in tax policies or intensity of support).