Ukraine industry speeds up to 5.6% in January

Ukraine industry speeds up to 5.6% in January

We follow industrial production more closely than GDP as we consider it a more leading indicator of the Ukrainian economy. We continue to see on the ground signs of the improving situation as businesses are full, property prices have started to slowly creep up and we have seen a definite increase in rental rates.

Ukraine industry speeds up to 5.6% in January

Ukraine’s industrial output sped up in January to +5.6% yoy vs. +4.5% yoy in December 2016, according to a State Statistics Service report on Feb. 22. Machinery (+16.1% yoy vs. +2.1% yoy in December) and metals (+8.5% yoy vs. +0.5% yoy) were the main drivers of growth through the month. At the same time, utilities and mining slowed down to +2.3% yoy (vs. +10.4% yoy in the prior month) and +0.3% yoy (vs. +0.6% yoy), respectively. Chemicals declined even further, down to -8.9% yoy from -6.1% yoy in December. Among secondary industries, we observed impressive performance by rubber and plastic production (+20.3% yoy vs. +1.2% yoy) and textile production (+13.0% yoy vs. +3.6% yoy).

By region, we saw the fastest growth in Zhytomyr Oblast (+42.7% yoy) in the center, in frontline Luhansk Oblast in the east (+30.0% yoy) and down south in Odesa Oblast (+24.5% yoy). Few regions were still reporting in the red.

Alexander Paraschiy: Industry is performing much stronger than we expected. However, we still see quite a mixed picture. Some industries, including auxiliary sectors, reported two-digit growth while others effectively worsened. To a large extent, the substantial industrial speed up was achieved on the back of an upsurge in machinery growth (rates not seen since January 2012) and a substantial speed up in metals production. While we perfectly understand what happened with metals (commodity prices are rising), the reasons for the two-digit growth in machinery are not so obvious. Previously, the sector had been extremely volatile and we should not rush to become too optimistic about a one month observation.

Industrial performance for the upcoming months is uncertain in light of the blockade of railway connections with occupied Donbas. The trade blockade started in late January and already by mid-February major supplies from the occupied territories had stopped.

The blockade is taking a heavy toll on the production chains of Metinvest, Industrial Union of Donbas and DTEK and we have every chance to see industry substantially slowing by the end of February.

All in all, we have quite a mixed picture about the January industrial speed up (high chances that the positive number is just an outlier), we have trade blockade of occupied territories still unfolding and we have expectations that metal prices will roll back through the course of the year. Against this backdrop, we do not see any reason to rush with revision of our forecast. Therefore, we still project industry increasing +1.8% yoy in 2017. However, we do mark the number for potential revision if we observe signs of a sustainable recovery in machinery sector.

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