Industrial production (wda) surprisingly contracted by 8.1% y/y in August following the 2.8% y/y growth in July and came into a major negative surprise to markets that expected 2.7% y/y growth in the month, according to data of the statistical office published on Thursday. The August print is the strongest contraction since July 2016. In seasonally-adjusted terms, industrial output decreased by 2.6% m/m in August, thus potentially indicating further contraction in the next months, especially in view of the continuing to decrease new industrial orders.
The industrial output contraction in August was solely driven by the key exporting sector – the manufacturing, which production dropped by 9.5% y/y in the month following 2.7% y/y growth in July. The annual slump of the manufacturing output was mainly driven by the key automotive sector, which is also key exporting sector as the pace of contraction of its output deepened to 14.1% y/y in August from 5.8% y/y in July, thus having 4.03pps contribution to the industrial output fall in the month. The continuing and even faster fall in our view reflects the fact that the conditions for already established companies in the automotive sector may not be ideal anymore and under the influence of a weaker demand in Europe, especially in the country’s main trading partner Germany. The latter in our view has prevented the new automotive capacities of Jaguar Land Rover to boost the industrial output as previously expected. At the same time, one should bear into mind that both the July and August data are somewhat distorted by the regular summer and maintenance holidays at major companies, including the carmakers. Yet, the August transport equipment output slump is so deep and the strongest since July 2016, which along with the continuing to contract new industrial orders in the sector, may be suggesting that the car industry has exhausted its capabilities to drive the industry’s expansion, in our view. The second strongest negative contribution to the manufacturing output change in August (3.06pps) had the production of rubber and plastics as its output dropped by 25.6% y/y in the month following 10.7% y/y expansion in July. The third biggest negative contribution (2.16pps) had output of basic metals as its fall deepened to 18.2% y/y in August from 14.5% y/y decrease reported in July — the metallurgical industry has been moving in red digits for a long time, struggling with a cyclic deceleration of the EU economy, as well as long-term structural problems in the European metallurgy and strong non-European competition. Unlike the previous three months, the coke and refined petroleum products output prevented a stronger slump of the manufacturing production in August as it rebounded growing by 17.1% y/y in August following double-digit drops reported in May-July. Obviously, the planned maintenance of production facilities at the Slovnaft refinery, which was reducing output chiefly in May and June, has ended. The production of electrical equipment continued to support the headline print, but to a smaller extent, while the output of the production of machinery and equipment, also a strong export branch, slumped by 2.5% y/y in August, for the first time since August 2017, thus eventually succumbing to the cyclical deceleration of European economies and weakening external demand.
Given the adverse developments in the manufacturing sector with eight branches having negative contribution to the manufacturing output change in August, up from six in July, unless we see a major rebound in September, we may expect that industry will have a negative contribution to GDP growth in Q3, bigger than that reported in Q2. The stats office is to release flash Q3 GDP growth estimate on Nov 14, while detailed data are due on Dec 5. Overall, the odds for the industrial output to recover are small and largely depend on the car sector, which is however constrained by faltering demand abroad. Therefore, even though Jaguar is gearing to full employment and for launching a second shift and a second model in the plant, its plans for higher output may be dashed to the ground by the adverse negative external developments. Moreover, potential saturation of the European car market and likely to worsen consumer confidence in both Slovakia and Europe as the economies cool down may hurt the local industry that is highly exposed to the automotive sector. Another external risk is possible intensification of protectionist policy in foreign trade globally. On the domestic front, the existing labor shortages, especially of skilled workers, especially in the automotive sector, are likely to remain main constraint on the industry’s future development, hence on stronger exports and overall economic expansion, in our view.