Industrial production growth accelerated to 7.6% y/y in January from upwards revised 5.8% y/y expansion reported in December 2016, according to the latest figures of the statistical office published on Monday. The print was more than double the market consensus for 3.5% y/y increase and the strongest one in five months. All sectors supported the industrial output expansion and pace acceleration in January. In monthly terms, industrial output was up by 0.7% m/m (sa) in January, thus continuing to show significant volatility but grasp of even stronger growth momentum.
As usual, the industrial output growth was driven by the manufacturing sector, which development also backed its pace acceleration in the month. Manufacturing output expansion speeded up to 6.3% y/y in January from upwards revised 4.9% y/y in December. However, unlike the usual pattern, the manufacturing output growth acceleration was not driven by the automotive industry, which output growth slowed down to 3.2% y/y in January from the upwards revised 4.5% y/y in December, possibly to reflect the fact that the country’s major carmaker Volkswagen Slovakia announced a three-week outage of its plants that started on Dec 24 and has continued by Jan 19. Nevertheless, given the sector’s big share in the manufacturing and the robust pace of expansion, it remained main growth driver of the industrial output growth also in January. Major factor for the manufacturing output stronger expansion in the month played the production of electrical equipment, the pace of increase of which speeded to the highest in five months 12.0% y/y in January from the negligible 1.4% y/y expansion the previous month. The much robust expansion of the food industry, as well as of the pharmaceuticals and of the basic metals sectors also contributed to the overall manufacturing output stronger expansion in the month. At the same time, the ICT industry faltered falling by 18.6% y/y in January (after 2.5% y/y expansion in December), thus preventing stronger manufacturing output growth in the month. Despite the extremely cold weather, the output of the mining and quarrying sector expanded at more than double rate of 19.1% y/y in January, while the cold weather supported the production of the utilities, the growth of which speeded up to 14.2% y/y in the month. We believe that the stronger output of the utilities sector to respond to the higher demand for power and heating has resulted into stronger demand for fuel from power and heating plants’ fuel, thus supporting the mining activity as well.
Going forward, we may expect the automotive sector to remain main driver of the country’s industrial production and exports, and hence economic expansion as VW Slovakia may be expected to gradually increase output given that some 2,000 new jobs are to be created in its local plants to take benefit of cheaper and skilled labour 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 labour. 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. In the meantime, 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 lack of qualified labour 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.