Industrial production grew by 5.4% year on year

August 2023 remained a month of stability for industrial production: in comparison with August 2022, output increased by 5.4%, with July 2023 – by 2%, excluding seasonality, Rosstat expects a decrease in output by 0.3% after a decrease of 0. 1% in July. From April-May 2023, industrial output has remained at 110% of 2020 levels. Most industries are included in stronger growth, which, as the work of the Central Bank demonstrates, should be extensive, but limited in time due to difficulties with importing raw materials and equipment. The work of the fuel and energy complex, chemistry, metallurgy and timber processing is hampered by sanctions.

Rosstat data on industrial production in August 2023 showed that “overheating” in the economy is recorded not only in general (as an imbalance of supply and demand), but also in industry. Its output continued to grow in annual terms by 5.4%, while the monthly dynamics of total output in industry, cleared by Rosstat from seasonal and calendar factors, was negative: a decrease of 0.3% in August versus July after a 0.1% decrease in July versus June 2023. The industry has been holding at 110% of the 2020 output since May 2023. “Taking into account the seasonality factor, the dynamics are similar to last month (+0.1% m/m SA),” states the Ministry of Economy.

In terms of industry, the picture is similar to July. Output in mining in annual terms decreased by 1.2% (in July by 1.5%), in processing, largely due to state defense orders and its financing, growth continues to accelerate – 10.3% year-on-year versus 9.5%. in July. As Vladimir Salnikov from TsMAKP notes, “in fact, only energy resources are dragging down indicators; metallurgy and timber processing are stagnating. Everything else is growing according to the trend, the fastest being the food industry, the production of plastics and rubber, electrical equipment, and electronics.” As the authors of the Telegram channel “Hard Figures” state, “the economy is still above potential”: other Rosstat data show that the “overheating” of consumption is accompanied by a very strong increase in business activity in retail, especially in the manufactured goods sector, in wholesale trade, a continuation of a strong growth in construction activity (by 8.9% year-on-year) and persistent record low unemployment (3%). In the comments of the Ministry of Economy, GDP growth for January-August is estimated at 2.5%, excluding the seasonal factor, the department believes that Russian GDP growth in August slowed to 0.4% from 0.6% in July.

According to surveys by the Gaidar Institute, optimism in industry reached its peak in August 2023 (estimates of future demand reached the level of January 2022); in September it adjusted slightly, as did inflation expectations and, to a lesser extent, expectations for future hiring. The plans of enterprises, as stated in the laboratory of Sergei Tsukhlo in the IEP, are still contrastingly optimistic in comparison with the plans of companies in Germany and Finland. Apparently, part of this effect is a consequence of the growth of domestic demand in industry, which was previously covered by imports into the Russian Federation of mechanical engineering products and a number of other industries: the departure of foreign suppliers, potential or actual competitors, from the market after the start of the Russian military operation in Ukraine is the main event of the last year and a half, providing companies with both optimism and space for growth, which is reflected in the constant increase in the formal load and intensity of use of existing capacities, but without the commissioning of new ones.

What the growth of Russian manufacturing looks like in detail and how sustainable it is is partly explained by the analytical note published by the Bank of Russia “Russian manufacturing industry under sanctions: results of a survey of enterprises.” The survey was conducted at the end of 2022 (1974 enterprises). His main conclusions are that the main processing problems were not so much the cessation of external supplies of raw materials and equipment, but failures in them, and by the second half of 2023, at least a significant part of such problems had been resolved. In general, the scale of problems in processing is limited, although not insignificant: 41% of companies that used imports in production (21% of companies did not import raw materials at all, equipment – 26%), faced a complete cessation of supplies, 15% do not see a way out of the situation. Among those who planned to import equipment, 29% suspended investment projects, 66% postponed their deadlines, and 14% abandoned them completely. Unlike intermediate goods, almost no one was planning to purchase equipment from the USA and Japan through parallel imports in 2023; 18% were counting on supplies from the EU, the rest were focused on either Russian or Chinese-Indian supplies.

This picture fits well with the assumption that industrial growth in the summer of 2023 remained extensive and was ensured by capacity utilization – even a fairly confident increase in output from Russian equipment manufacturers does not give (given the volumes) the opportunity to assume otherwise. The result will be faster depreciation of efficient equipment (increasing demand for it, the need for large investments) and the use of less efficient and outdated capacities. However, the potential for further growth in this scenario remains – the question is whether it will last for months (in this case, investments already made in the production of capital goods will not stop the decline) or years.

Dmitry Butrin