Industrial production (wda) rose by 5.6% y/y in February, thus decelerating from 7.2% y/y expansion reported in January, according to data of the statistical office published on Wednesday. The February print thus came into a positive surprise to markets that projected 4.5% y/y growth in the month. In seasonally-adjusted terms, industrial output inched up by 0.2% m/m in February, thus indicating possible further acceleration in the next month.
The annual growth deceleration in February was mainly on the back of the key exporting sector – the manufacturing, the expansion of which slowed down to 5.5% y/y in the month from 7.9% y/y in January. Contrary to the developments in December 2018 and January, the pace of expansion of the key automotive sector slowed down markedly to only 14.6% y/y in February from 38.1% y/y in January and 26.3% y/y growth in December, possibly reflecting some temporary disruptions in car production. Despite the reported deceleration, the car output expansion remains quite robust and continues to be supported by the newly-launched operations of the fourth car manufacturer Jaguar Land Rover, in our view. In the meantime, the paces of expansion of manufacturing of machinery and equipment, and of electrical equipment accelerated markedly in February, and along with the rebounding output of the ICT products supported the robust growth of the manufacturing and headline industrial output in the month. At the same time, the production of basic metals, rubber and plastic products, of textiles remained on the contractionary territory in the month.
We maintain that the industrial sector will be key driver of the economic growth going forward. However, the medium-term outlook on the development of the industrial sector is overall mixed with the risk seemingly being mostly on the downside. On the upside, as Jaguar launched its new EUR1.4bn car plant last October and has started to export its first cars worldwide around the turn of last year, we may expect industry and exports to get a boost this year. On the downside, the expected marked slowdown of the economic activity in the EU countries, including Germany, key market for Slovakia’s manufacturing produce that seems to be on the brink of recession, may result into slowing down industrial production growth. Moreover, potential saturation of the European car market and likely to worsen consumer confidence as the economies slow 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 labour shortages, especially of skilled workers, especially in the automotive sector, remain main constraint on the industry’s future development, hence on stronger economic expansion, in our view.