July 2012 Industrial Production: Not Good

I’ve had a busy time the last two days, hence haven’t been able to cover this when the data came out.

Monday’s industrial production report from DOS paints a picture of tepid growth (log annual and monthly changes; seasonally adjusted):

The y-o-y numbers, except for mining, look pretty decent, but the monthly log changes shows contraction across the board. A look at the levels shows mining output to be the worst hit (index numbers; 2000=100):

Electricity generation, as should be expected, is on a consistent uptrend, but manufacturing growth (apart from the spike in February coinciding with CNY), is pretty flat this year, and only marginally higher than 2011.

I don’t think the drop in mining is permanent, and we should see a bounce back similar to the previous time this happened (May 2011). Having said that, mining’s weight in the IPI is just 23.4% and a return to June’s level of output for instance would only boost the overall index by a couple of index points; not enough to actually show growth in the overall index.

For 3Q2012 GDP, July’s IPI level doesn’t provide much room for optimism:

The forecast based in IPI alone suggests growth for 3Q will be a hair under 3.6% y-o-y, with the 1 standard deviation range forecast at between 4.7%-2.5%. The quarterly seasonally adjusted forecast on the other hand is showing an outright contraction, of around 3.7% annualised.

But…I’ve got somewhat better forecast models now, and they’re most of them suggesting substantially stronger growth than this – for those models, there’s a very low probability (2.5%) that the GDP growth number for 3Q will be below 4.2%.

So I think that we should see growth closer to the upper end of the IPI forecast, somewhere between 4.2% to 5.2%.

Of course, as data comes in this view will change, as the IPI forecast is extrapolating off just one month’s data. Once the IPI for August is in, we’ll have a much more solid feel for growth in the second half of this year.

Technical Notes:

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