Russia’s industrial output growth slowed to 1.5% y/y in February in surprise result.

In February, Russian industry grew by 1.5% y/y, Rosstat reported on March 19. This was significantly lower than the consensus 2.7% forecasts and the growth rate seen in January (2.9%). In seasonally-adjusted terms, industry expanded by 1.8% y/y last month after 2.3% y/y growth in January and a contraction by 0.7% in December 2017.

“If not for one extra working day in Feb-18 vs Feb-17 – manufacturing output would have been negative y/y, mirroring the last 2 months of 2017,” BSC Global Markets chief economist Vladimir Tikhomirov said in a note. “We attribute the weakness to cuts to defense procurements; we continue to expect industry will grow by 2.1% y/y on average in 2018.”

Weak data is even more surprising as there was one extra work day in February 2018 compared to the same month in 2017, which usually helps boost headline numbers in manufacturing. However, manufacturing grew by 1.9% y/y last month vs 4.7% in January, while growth in the resource industry slowed to 0.3% y/y (1.1% in January). At the same time, a positive shift was seen in the utilities sector, which grew by 1.8% y/y (vs -2.2% in January), but this was solely driven by much colder weather and, consequently, by increased demand for heating, gas and electricity.

The segments of industry that demonstrated a strong y/y dynamic in February were natural gas, electricity, processed meats, chemicals and refinery, and the production of cars, locomotives and rail cars. At the same time, the main laggards in terms of y/y growth were crude oil output, construction materials and dairy and cheese production.

Manufacturing is still the key factor behind volatility in Russia's industrial output. In January, strong industrial growth was driven solely by manufacturing and in February it was this very sector that proved a drag on industry. Although increased volatility in the industrial dynamic is not unusual at the start of each year – due to a combination of fiscal, calendar and weather influences – we believe that the underlying reason for the weakness was cuts to defense procurements by the government. While the future trend in industry will depend, among other things, on the content of the new policy agenda of the Russian government, we continue to expect that in 2018 industry will grow by 2.1% y/y on average.