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Industrial Growth Slowed to 0% in August

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This post first appeared on Russia Insider

August's Industrial Production data was nothing short of disappointing as there was no growth for the month versus the prior August.

The data includes three main sections; extraction of raw materials, manufacturing and gas, water and electricity distribution.

<figcaption>A Summer Slowdown as Inventories Run Down</figcaption>
A Summer Slowdown as Inventories Run Down

For much of 2014 the only positive had been manufacturing. But in August there was a complete reversal in these trends. 

Extraction of raw materials accelerated from July's 0.2% growth to 0.8% matching the year-to-date tally. This was very impressive given that natural gas production was down 12% in August owing to the Ukraine-Gazprom gas dispute.

Coal helped make up for gas's losses, as its 2.9% gain on the month reversed a 3% contraction for the year. 

Manufacturing registered its first month of contraction since August 2013 contracting by 0.6% year on year. This compares very negatively to the year to date's growth of 2.2%.

The fall off in growth was almost entirely "driven" by the auto-sector which had been suffering from over-supply; car production for instance was down 40% in August having been virtually unchanged in the preceding months of the year.

It is worth noting, however, that the domestic producers are taking enormous market share from the importers as an article in today's Financial Times reveals. 

Gas, water and electricity distribution registered its second positive month in a year, accelerating to 1.2% from July's 0.8% and positing the best month since April 2013. 

On the face of it, the data is very bad as Industrial Production had been growing at 1.5% in the first half of 2014; August's 0% marks a significant slow-down in production. That being said, the two non-cyclical segments of extraction and gas, water and electricity distribution both posted impressive figures. Thus, when the manufacturing segment and in particular the auto segment recover the trend rate of growth of Industrial Production will be higher than in the first half of 2014 and all of 2013. 

Auto demand as been hit as consumers have delayed big ticket purchases. The encouraging sign is that, consumers will have to purchase their cars at some point - they cannot delay forever, and they have the finances to do it - the fall off in demand has been accompanied by a rise in the savings rate, and not a fall in employment.

In short, the Russian consumer's balance sheet is very healthy and as soon as confidence returns the industry should once again resume on a path of strong growth. 

Finally, Industrial production at 0% in August is a reflection of companies running down inventories after production growth in January to July outstripped demand. A supply and demand rebalancing was always likely to occur. 

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