Industrial production (wda) declined by 2.1% y/y in June after growing by 4.7% y/y in the month before and came as a negative surprise to markets, which expected production to grow by 5.9% y/y in the month, according to data of the statistical office published on Friday. In seasonally-adjusted terms, industrial output fell by slower 1.4% m/m in June but the stats office said that production in June was at the lowest level since Apr 2017. We also note that industrial output declined for the first time since Mar 2018, when the decline was marginal at 0.1% y/y. In Q2, industrial output growth eased to 3.2% y/y from 6.7% y/y in Q1, which together with the decline in retail sales and exports, points towards a deteriorating performance of the economy in the quarter.
The annual decline in production in June came mainly on the back of the key exporting industry – the manufacturing, where production dropped by 4.1% y/y in the month. Production in the key automotive sector declined by 7.6% y/y in the month for the first time since Jan 2018 and was the leading factor behind the decline in manufacturing sector output in June. The decline likely reflects the fact that the conditions for already established companies in the automotive sector may not be ideal and under the influence of a weaker demand in Europe, and Germany in particular. The moderating growth pace of output of other manufacturing, electrical equipment and of machines and equipment, coupled with the sharper contraction in the output of production of chemicals and pharmaceuticals also contributed to the manufacturing and headline industrial output decline in June. At the same time, the speeding up expansion of the production of food prevented a stronger fall in the month.
The medium-term outlook on the development of the industrial sector is overall mixed with the risk being mostly on the downside. On the upside, Jaguar has started to export its cars worldwide at the turn of 2018 and 2019, and is gearing to full employment and launch of a second shift and a second model in the plant. On the downside, the expected marked slowdown of the economic activity in the EU countries, including Germany, may result into further problems for the industry. Moreover, potential saturation of the European car market and worsenening consumer confidence in both Slovakia and Europe 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.