The industrial property market includes warehouses, garages and distribution centers.
Key customers of industrial spaces are retailers, distributors, manufacturers, and logistics operators. As with other markets, recent economic conditions and trade sanctions have affected the industrial market. Low export volumes especially contributed to many key industrial investment factors weakening.
Even though overall industrial production growth softened in 2019, some investment-driven sectors outperformed, including those focused on agriculture, oil downstream, chemicals, construction and transportation. For 2020 we continue to expect acceleration given the budget stimulus that had already been planned and potential extra injections.
Russian industrial production accelerated from 0.3% year on year in November to 2.1% YoY in December, somewhat below our 2.7% YoY expectations. We note, however, that both November and December data have been distorted by calendar effects: November 2019 had 1 workday less than November 2018, while December 2019 had 1 workday more than December 2018. Moreover, December data benefited from the splurge in year-end budget spending, which further complicates forecasting and lowers the indicative power of year-end statistics.
In full-year terms, industrial production (around 23% of the Russian GDP) decelerated from 2.9% YoY in 2018 to 2.4% YoY in 2019, which came in slightly below our 2.5% expectations. We don't take it as a sign of material deterioration of the industrial output trends for the following reasons:
Overall, the 2019 industrial output data points at a very limited negative reaction to adverse external and internal factors.
Looking into 2020, we see scope for acceleration in the industrial output growth, mainly thanks to the expected increase in the budget support.
For now, we keep our previous expectations of industrial output accelerating to 2.7% in 2020 and see some upside risks to this forecast if the government confirms plans to accelerate spending. Amendments to the budget plan (which even before the reshuffle, assumed 7% nominal growth in federal budget expenditure in 2020) are expected to follow by 11 February.
Meanwhile, if higher budget spending will not be accompanied by systemic measures aimed at promoting broad-based business climate, its effect on economic growth might be limited, and the higher dependence of growth on state-driven sectors will remain a longer-term concern.
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