June 2014 Industrial Production: Hold On To Your Hats, Folks!

The rocket has blasted off (log annual and monthly changes; seasonally adjusted; 2000=100):

This was…unexpected. After last week’s relatively weaker export numbers, I’d thought industrial production would settle down some, and maybe take a breather. Instead, there’s been a further jump in production. While exports seem to be treading water, manufacturing appears to have shifted up (index numbers; seasonally adjusted; 2000=100):

It’s early days yet though to determine if this is a truly structural shift, but there will be a salutary boost to 2Q2014 GDP growth. I didn’t quite believe the forecasts generated last month (IPI-based model: 7.0%), but with the June numbers in, GDP growth looks set to be even stronger than before (RM billions; 2005 prices):

That’s 7.0% in annual log terms and 7.3 in percentage terms (±2%), which would be the fastest pace of growth since 4Q2012. I find it hard to take that totally at face value, although the underlying numbers certainly suggest upside risk will be the norm this year. I’ve got more than a few models now for forecasting GDP and none of them are quite so bullish, but it’d be fair to say that 2Q2014 growth will be at or near the number of the first quarter.

Take a gander at some of the sector growth numbers, which were released concurrently with the June IPI:

1. Wholesale trade index: +7.3%
2. Retail trade index: +10.0%
3. Motor vehicle index: +9.7%
4. Construction work done: +10.8%
5. Manufacturing sales: +3.8%

Overall, it looks like strong services and construction growth, stable manufacturing growth, and a pretty positive net trade position. Even if there was a deceleration in 1Q2014 compared to 4Q2013, it looks like there’s more than a few legs left in this expansion.

One last comment I’d make though is that I’d be looking for inventories to rise – the dichotomy between production and exports suggests producers are rebuilding their stocks after a strong couple of quarters of sales. That means output growth might decelerate in the second half of the year. But in this year of pleasant surprises, I’m not betting on it.

Technical Notes:

June 2014 Industrial Production Index report from the Department of Statistics (warning: pdf link)