Russian industry: Looking beyond the headline numbers
Rosstat reported recently that industrial output in Russia increased 2.4% in 2019 and 2.1% y-o-y in December, therefore pointing to deceleration given that industry expanded by 2.9% in 2018. The growth in the mining segment of Russian industry decelerated in 2019 but remained quite strong – it grew 3.1% (versus 4.1% in 2018). However, the y-o-y quarterly growth deceleration was quite sharp - from 7.2% in 4Q18 to 4.7%, 3.3%, 2.9%, and 1.3% in 1Q19 to 4Q19, respectively.
At this stage we can forecast growth in the mining sector in quite a wide range between 1.6% and 2.5% in 2020, which stems not only from some unpredictable factors, such as local and external demand for energy that depends not on highly unpredictable weather conditions alone, but also from discrepancies in the y-o-y growth numbers in this sector published by Rosstat.
Given that the ownership structure of the Russian economy is not going to change any time soon, the composition of Russia’s growth will not change in 2020, either. As consumer demand may expand only moderately, it is likely that manufacturing growth in 2020 may be either similar to that of in 2019 or a bit lower.
* Even though manufacturing decelerated in 2019 and grew by 2.3% (compared to 2.6% in 2018) its performance looked more stable during the year. Following a rather poor performance in 4Q18 and 1Q19 (y-o-y growth was roughly around 1%) y-o-y growth rebounded and fluctuated between 2.4% and 2.9% from 2Q19 to 4Q19, albeit it was rather uneven across various subsectors.
* Strong growth of cement production and ready-mixed concrete was recorded in 2019 (7.4% and 12.0%, respectively), which indicated that some kind of construction activity was taking place in the country.
* Strong growth in production of locomotives and railroad cars was accompanied by contraction in car production. The demand from cash-rich state-owned RAO RZhD (railway company) was strong, while consumer demand for cars remained subdued. Local production of cars weakened in 4Q19 as imports started to rise in response to ruble strength.
* Production of cars is unlikely to bounce back because despite low inflation (3.0% in 2019 and possibly around 2.5% in January 2020) and a lower key policy rate, banks were not in a rush to cut consumer lending rates.
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