An unhappy state of affairs is formed in the industrial production

Data of business surveys of the Gaidar Institute evidence that the May expectations for demand growth which had encouraged enterprises to increase output were not met and the output growth in June under the conditions of the declining demand became a problem for the Russian industry.
This resulted in the sharp increase of dissatisfaction with sales and the excessive finished goods inventory and made companies carry out a negative revision of their demand forecasts, output plans and employment plans for July-August.

The actual reduction of output prices and intention to cut investments were the last drops in the formation of an unhappy state of affairs in the industry.


The sharp rise of optimism based on the May forecast did not justify itself in June. The sales dynamics failed to fight the negative trend of the last months neither in terms of original nor in terms of seasonally adjusted data. As a result, the decline in the growth rate was in the interval between 13 and 11 points during the entire 2nd quarter. This circumstance and the negative shock from wrong forecasts of May determined the dynamics and estimates of other key indicators.


Firstly, the actual growth dynamics in June disappointed enterprises. Dissatisfaction with the sales of manufactured products grew by 8 points and almost reached the post-crisis anti-record recorded in January 2013.

Secondly, the optimism level started to decline. Demand forecasts for July-August decreased both in terms of original (by 8 points) and seasonally adjusted (by 8 points) data but remained positive, i.e. in industry there are more hopes for sales growth than for their downfall.

Thirdly, the balance of estimated finished goods inventory worsened by 10 points in June.


The worsening of the balance of estimated finished goods inventory was due to the growth in the number of "above the norm" responses to 33% and decrease in the number of "below the norm" responses to 6%. As a result, the balance increased to +27 points and reached the level recorded in December 2008 and January 2009, i.e. at the peak of the last crisis. At the moment the situation is yet far from the crisis in the sense we saw it then. However, certain circumstances look alarming. For example, the share of "below the norm" responses in estimating inventory decreased to 6%, which is the historical minimum for the entire period from 1993 to 2013. Even at the end of 2008 and in the beginning of 2009 the share of these estimates was 12%. In other words, for 12% enterprises insufficient inventory of finished goods was an additional motivation for output growth. Now such a motivation in the Russian economy is at the minimum level and one third of the industry is, most likely, ready to slow down output under the pressure of excessive inventory. It seems that economic authorities also understand the above state of affairs because they do not mention finished goods inventory as an economic growth driver as they used to do not so long ago.


In June the industry demonstrated production growth both in terms of original and seasonally adjusted data. It occurred due to the May plans of enterprises. Hence, consumers of the Rosstat (Russian State Statistics Service) data perhaps will be happy with the official June statistics of the industrial production, which will, most likely, show a modest but still growth of output. But for the industry the growth of production volumes in June has become a problem under the conditions of demand decline. In this situation enterprises, trying to avoid risk, negatively adjusted their output plans for July-August. The balance of original plans decreased by 18 points and in terms of seasonally adjusted data - by 10 points. The industry has not seen such a drastic revision of these plans for already 21 months. Such a change in enterprises' production intent has become the forth consequence of the substantial discrepancy between the actual dynamics of demand and output in June.


Another consequence of the discrepancy between the actual dynamics of demand and output in June and of the excessive inventory was an unprecedented decline in output prices of enterprises. The balance lost 8 points and dropped down to -11 points, i.e. in June the industry turned to an absolute reduction of its prices. Such intensive (mass) decline in prices in 2010-2013 was recorded only twice in December. The growth in prices in June was observed only in the forest and food industry, consumer goods production and construction.


Price changing plans which grew in May by 5 points in anticipation of the July tariff growth lost 2 points in June. They are now close to the minimum values of 2010-2013 indicators recorded in March-April 2013 and in October 2011. It looks like in 2013 enterprises will fail to "play on" the planned tariff growth of the mid-year in their attempts to stimulate the demand for products. As a result, financial outcome of the year may turn out to be even more depressing than that of the 1st quarter.


In June surveys did not recorded any principal changes in the dynamics of employment in the industry. Enterprises still report that more employees are dismissed than hired. As a result, the industry was losing (dismissing) employees during the entire first half of 2013. In May-June an increase in the number of employees was observed only in non-ferrous metallurgy (balance +7 points) and food industry (+9 points). The most considerable redundancy took place in the consumer goods industry (-20 points) and forest industry (-18 points). Redundancy dominated at enterprises of all legal forms and sizes.


Employment forecasts do not promise any improvement of the situation but rather the contrary. The forecast balance after being at a zero level in January-May dropped by 15 points at once. Such a sharp decline of this indicator in 2010-2013 was recorded for the first time.

S.V. Tsukhlo, Head of the Business Service Laboratory