Industrial production decline in Russia slows down by year-end

Further growth in 2021 is feasible but will require fiscal support

Industrial production decline in Russia slows down by year-end
Photo: No Redeeming Value

Russia’s industrial output contracted by 2,9% in 2020 due to a sharp fall in commodity extraction. Meanwhile, other sectors saw a substantial recoverу by the end of the year, which was partially driven by temporary factors. To continue into this year, industrial growth needs permanent support.

Russian industry ended 2020 on an upbeat note, reports ING Think noting that a number of support factors might have been temporary. Preliminary data showed that Russian industrial production saw a very mild year-on-year drop of 0,2% in December 2020, while Reuters’ consensus and ING analysts expected a drop of 3% and 1,5% respectively. As a result of the December rebound and a 1,1% upgrade of the November figure to -1,5% year on year, the full-year drop in industrial production was better than expected was at 2,9%.

December had an extra working day, which could have added 0,5-1% to its overall result, mostly in manufacturing sectors. On the contrary, January 2021 has two working days less than January 2020. Abnormally cold weather in December 2020 with temperature by 4,5 degrees Celsius lower than in December 2019 caused a spike in electricity generation and added another 0,8% to the overall industrial output. This effect may continue and even increase in January 2021, as the average temperature is still significantly lower than a year ago.

Abnormally cold weather in December 2020 caused a spike in electricity generation. Photo: pixabay.com

Besides temporary factors, the improvement seems to be at least partially supported by fundamentals, considers ING Think pointing at the year-end improvement in the non-fuel budget revenues and the slowdown in imports drop. Around 85% of the annual drop in industrial output has been caused by a decline in commodity extraction. However, decreased activity in oil downstream, metals processing and car manufacturing has been offset by an increase in consumer-focused production, such as food, clothes, pharmaceuticals, furniture and construction materials used in renovation.

While industrial production results in January 2021 may be non-indicative due to temporary effects of working days and cold weather, full-year prospects seem to be favourable, especially in case of relaxation of commodity extraction limits. At the same time, industrial growth above 3,0-3,5% will require further recovery in the consumer and investment sectors with fiscal policy potentially playing a crucial role. Given a 6% contraction in nominal terms in the budget draft for 2021, experts see scope for fiscal or monetary support to industrial output as limited.

By Anna Litvina