Industrial production (wda) growth accelerated to 5.4% y/y in October from the 2.3% y/y expansion reported in September, according to data of the statistical office published on Tuesday. The print came into positive surprise to markets, the consensus estimates of which pointed to 5.1% y/y increase in the month. All subsectors safe for mining and quarrying that contracted contributed to the industrial production expansion in the month. In monthly terms, industrial output increased by 1.4% m/m (sa), thus continuing to show significant volatility but also some gain of growth momentum.
As usual, the industrial output development in October mainly reflected that of the manufacturing, the output of which expanded by 5.5% y/y (wda) in the month, speeding up from 1.8% y/y expansion reported in September. The performance of the automotive sector, the most important one for the country’s industry, continued to be somewhat disappointing as its output expanded by the slow 1.8% y/y in October, almost fully erasing the 1.9% y/y slump reported in September. This might be reflecting several factors. On the one hand, local car makers might be close to the top of their production capacities and also be constrained by shortage of qualified labour. On the other, the observed of late moderate expansion of car sales in Europe may be indicative of saturation of the market, which may put limits to local car production unless new markets are found. Otherwise, the rebounding expansion of the output of electrical equipment by 5.9% y/y in October (after 0.8% y/y decrease in September), of machinery and equipment by 2.7% y/y (2.6% fall the previous month), as well as speeding up paces of increase of the output of the chemical industry to 39.4% y/y (12.9% y/y in September) and of basic metals (to 15.2% y/y), also contributed to the stronger manufacturing, and hence overall industrial production expansion in October. At the same time, the even stronger contraction of the output of the ICT industry – 11.9% y/y, deepening from 6.6% y/y fall in September, prevented even stronger acceleration of manufacturing and total industrial output growth in October. The utilities output expanded by 6.3% y/y in October, moderating from 9.7% y/y expansion the previous month, and also prevented even stronger total industrial output growth in the month. The mining sector remained on negative territory for the seventh consecutive month contracting by 4.9% y/y in October.
Overall, in the medium term we may expect the automotive sector to continue supporting the country’s industrial production and exports, and hence economic expansion, as Jaguar Land Rover is to launch its EUR1.4bn car plant late next year. However, the pace of the automotive sector expansion may be constrained by the seemingly gradually saturating car market in Europe, as well as local car makers reaching their full capacities. Still, the latter might not be a major problem as VW Slovakia is to gradually increase output as it plans to create some 2,000 new jobs in its local plants to take benefit of cheaper and skilled labor force. The production of Opel cars may also potentially shift to Slovakia after French PSA Group that runs the PSA Peugeot Citroen Slovakia in Trnava agreed with General Motors to buy the Opel brand. Moreover, PSA announced investment of EUR165m by 2021 that would increase its capacity to 360,000 vehicles. Slovakia is also competing with Romania and Hungary for EUR200m investment of Japanese car producer Mitsubishi Motors in a new engine or turbine plant in CEE. Note that Moody’s has earlier estimated that the planned investments in the automotive sector are to boost Slovakia’s export potential and to support the country’s annual car production to up to 1.5mn units, while the new automotive capacities are to contribute 2.5pps to GDP growth by 2020. Overall, we expect industrial production expansion to continue in the next months on the back of increasing new orders in Germany, as well as the overall upbeat sentiments among industrialists. At the same time, potentially lower external demand may weigh on the industry’s development, which could be additionally limited by the increasing qualified labour shortages amid shrinking labor market, in our view.