Industrial production growth eases to only 2.6% y/y in Slovakia

Industrial production (wda) growth decelerated markedly to 2.6% y/y in February from slightly downwards revised 7.5% y/y expansion in January, according to the latest figures of the statistical office published on Tuesday. The print was almost half the market consensus for 5% y/y increase and the slowest one in almost a year. Still, partial influence over the industrial production growth slowdown in the month was the fact that February 2017 had one working day less and was one day shorter than a year ago as 2016 was leap year. All the three main sectors supported the industrial output expansion in February, but their pace of increase slowed down as compared to January. In monthly terms, industrial output was down by 0.9% m/m (sa), thus continuing to show significant volatility and also loss of growth momentum.

As usual, the industrial output growth was mainly driven by the manufacturing sector, which development was also characterized by much slower pace of expansion in the month. Manufacturing output expansion slowed down to 2.2% y/y in February from downwards revised 6.2% y/y growth in January with the observed growth deceleration being mainly influenced by the contracting by 2.3% y/y output of the automotive industry (after 3.4% y/y increase in January). Other subsectors supporting the manufacturing output growth in February were also the production of electrical equipment, which expansion however slowed down to 6.1% y/y in the month from 9.9% y/y in January, as well as the production of machinery and equipment (up by 6.7% y/y, slowing down considerably from 17.5% y/y surge in January). The continuing robust expansion of the food industry, albeit at a slightly slower rate of 16.6% y/y (17.4% y/y growth in January) also contributed to the overall manufacturing output expansion in the month. At the same time, the ICT industry output contracted by 1.3% y/y in the month (18.6% y/y drop in January), the chemicals industry production shrank by stronger 4.7% y/y, while the pharmaceuticals production fell by 8.9% y/y in January (42.4% y/y surge in January), thus preventing stronger manufacturing output growth in the month. The output of the mining and quarrying sector expanded at a robust pace of 7.4% y/y in February, while that of the utilities sector – by 5.0% y/y. We believe that the observed deceleration of the annual pace of increase of the two sectors as compared to January reflects the fact that the previous month was an outlier in terms of extremely cold weather, which pushed up demand for electricity and heating, thus supporting the sectors’ double-digit expansion in the month.

We believe that the February industrial output and in particular, the automotive sector prints are outliers influenced by calendar effects. Going forward, we may expect the automotive sector to continue to be the main driver of the country’s industrial production and exports, and hence economic expansion 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. Moreover, after French PSA Group that runs the PSA Peugeot Citroen Slovakia in Trnava agreed with General Motors to buy the Opel brand, the production of Opel cars may potentially shift to Slovakia to benefit from the skilled but cheap labor. Moreover, Slovakia is competing with Romania and Hungary for EUR 200mn investment of Japanese car producer Mitsubishi Motors in a new engine or turbines plant in CEE. Note that Moody’s has assessed that the planned investments on part of Volkswagen, PSA and Jaguar Land Rover would boost Slovakia’s export potential with the investments (to be at full capacity as of 2018-2020) to support the country’s annual car production to up to 1.5mn, while the new automotive capacities to contribute 2.5pps to GDP growth by 2020. Still, in the near-term stronger expansion, and hence, contribution of the automotive sector to the economic growth may be constrained by the fact that the country’s three car makers have been running at full capacity for some time now, while there is increasing shortage of qualified labor force. Overall, we expect the industrial production to continue expanding on the back of increasing new orders in Germany and in the local automotive sector, as well as the improving sentiments among industrialists. At the same time, potentially lower external demand, at least partially on the back of uncertainties related to the election cycle in several EU countries, France and Germany in particular, may weigh on the industry’s development going forward.

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