Despite lower than expected May reading, April and May's data in 2Q shows some acceleration over 1Q.
The industrial production (IP) index (calendar adjusted) was below market consensus at 4.3% with a modest 3.4% YoY increase in May. Sector-wise, manufacturing production was a source of improvement in YoY performance, lifting May IP by +2.6%, followed by "electricity, gas, steam and air conditioning supply" with +0.7%. The impact of mining and quarrying on the headline was also positive, 0.16%.
On the other hand, following a strong 2.2% reading in April, the seasonal and calendar adjusted (SA) IP index witnessed a 1.4% contraction in the fifth month of the year. However, the performance of the two months in 2Q shows some acceleration over 1.4% QoQ growth in Q1.
May Industrial Production Growth
contraction of 1.4% from previous period
Among broad economic categories, intermediate goods and undurables turned out to be groups with MoM expansion of +1.1% and +2% respectively, while others were negative. Durable consumer goods that expanded since the beginning of this year, with the support of VAT cut, dropped 5.3% MoM in May, hinting at the fading impact of the government’s decision.
On the other hand, capital goods production plunged by 9.4% MoM with a correction in the aftermath of the 12% increase in April. However, the growth in the first two months of 2Q still shows a marked acceleration, notwithstanding the sluggish pace realised before the referendum, showing that investment decisions delayed due to political uncertainty were put in place with the better political environment. Boosted credit expansion with the support of the Credit Guarantee Fund has also contributed.
By manufacturing sector, automotive turned out to be the major contributor for the eighth time in a row, due to continuing demand from the EU, pulling the calendar adjusted headline up by 1.2%, followed by machinery & equipment (0.5%) and electrical equipment (0.40%). On the flipside, other transport equipment, dominated by defence industry products, showed a correction and reduced the headline by 0.4% after a strong 2% contribution in April.
The industrial production recovery that started in late 2016 continues
Overall, despite a weaker reading in May, the IP in 2Q hints that the recovery that started in the last quarter of 2016 is continuing, driven by policy measures such as macro-prudential easing and supportive fiscal stance as well as supportive external demand.
Recently released indicators such as manufacturing PMI, CUR, sectoral and consumer confidence show stronger growth momentum, though weak labour market conditions and higher interest rates are likely to drag the performance to some extent.