The industrial production growth (in wda terms) moderated significantly in June as it reached only 2.2% y/y, down from the slightly downwards revised 5.8% y/y expansion reported in May and the upwards revised 7.7% y/y growth in April, according to figures of the statistical office. The June print is the second lowest pace of increase since the beginning of the year and thus came into a significant negative surprise to markets that put the annual expansion in the month at some 5.1% y/y. In monthly terms, industrial output decreased by 0.1% m/m (sa) after stronger fall of 1% m/m (sa) in May, thus showing continued significant volatility in the sector. The annual growth slowdown was mainly on account of the manufacturing sector, as well as, to smaller extent, on the continued contraction of utility sector output, which we thing is likely related to the ongoing modernization of a thermal power plant in the country. Despite the observed annual growth deceleration in June, the print along with the April and May industrial output growth data, indicate that the sector’s contribution to economic growth in Q2 might have appeared even stronger than in Q1.
The output of the manufacturing sector expanded by 2.5% y/y in June after the downwards revised 7.9% y/y growth reported in May, thus reporting the lowest pace of expansion since Oct 2015. The manufacturing output increase in the month continued to be supported by the expanding production of transport equipment, electrical equipment and of chemicals, but the reported deceleration of the paces of increase of the output of these sectors were among the main factors for the overall industrial production growth slowdown in June. The production of transport equipment increased by only 9.1% y/y in June after the 18.7% y/y growth reported the previous month. Overall, the automotive sector has been characterized by significant volatility, but new investments into capacities’ expansion and reorientation of exports have helped local car manufacturers recover, even though the pace remains quite uneven, with certain decreases seen in April, May and August 2015. We expect the automotive sector production to remain strong in the next months as long as Slovak’s plants of both Volkswagen and Kia Motors plan their output this year to broadly remain at 2015’s levels, while that of PSA Peugeot-Citroen sees 4% output expansion. Yet, a significant increase in their output is unlikely as the three car manufacturers are already operating at or close to full capacity. The pace of increase of production of electrical equipment more than halved to 11.2% y/y in the month, while that of chemicals – was only 6.6% y/y in June (17.4% y/y in May). The production of machinery and equipment prevented stronger increase of the overall industrial output as it fell by 5.4% y/y in June after expanding by 12.4% y/y in May.
The moderating industrial production expansion in June is not surprising given the worsening sentiments in the sector; yet, the latter improved in July, which may be indicative of the sector’s rebound the next month. Still, given that two of the three carmakers –Volkswagen Slovakia and PSA Peugeot Citroen, halted their production for a few weeks in July and early-August, we may expect the industrial output growth to moderate further, or in the best-case scenario, to remain flat m/m. At the same time, we do not expect the utility sector contraction to prove permanent. The preservation of robust paces of increase of new industrial orders, especially in the automotive sector, continues to support our view that industry, in particular car production, will continue supporting the economic expansion going forward.