August 2012 Industrial Production

The IPI report is early this month, but that’s not necessarily good news. Apart from mining, the numbers are all looking down (log annual and monthly changes; seasonally adjusted):

Manufacturing and electricity output have now contracted for two straight months, although there was a m-o-m spike in mining output. Some of this can no doubt be put down to the Ramadhan effect, though, with factories slowing down output as workers and managers go home for the holidays.

What the IPI says about GDP is none to complimentary either (log annual changes; 1 standard error band):

We’re looking at 2.9% in log terms and about 3.5% in percentage terms, which is pretty depressing – although it has to be said that the standard errors are pretty big (1.1%) which gives a 95% range forecast of plus/minus 2.2% i.e. 1.3%-5.7%.

My personal feeling is that the IPI might be too pessimistic an indicator for GDP at the present time, as demand from the external sector is weak and most of the current action is in investment and construction. Export oriented industries take up 80% of the manufacturing index and I believe the mining index is similarly weighted, so the IPI would be heavily influenced by external demand.

In fact, a composite, weighted-average forecast shows rather brighter prospects (log annual changes; 1 standard error band):

The point forecast here is 4.9% (log) and 5.2% (percentage), but with much smaller standard errors of around 0.5%, which makes for a tighter 95% range forecast of 4.2%-6.2%. That in turn suggests that at worse, we’ll see 3QGDP growth at around 4.2%, with the greater likelihood (about 2/3rds) being that the the number will come in at between 4.7%-5.7%

[I’m planning to write a post on the methodology used above, which might be useful to some readers. Don’t wait up for it though].

Bottom line is that industrial output appears to be badly affected by external developments, though not to the point where it’s jeopardising growth…yet.

Technical Notes:

August 2012 Industrial Production Report from the Department of Statistics (warning: pdf link)