Industry is the main economic driver

Elmira ArnabekovaDecember 25, 2017

Short-term economic indicator for 11 months of this year increased by 5.1% compared to the same period last year. The growth rate of the indicator, as we expected, slows for the second month in a row, due to the lack of acceleration in industrial production and other sectors of real economy, except for transport and agriculture.

An industrial production in the period from January to November showed an increase of 7.3% yoy. According to our estimates, the contribution of this industry to the short-term economic indicator is around 3.7pp (which provides more than 71% of the indicator’s value). In the analyzed period, oil production (including gas condensate) rose by 11% yoy, metal ores were up by 8.2% yoy. However, practically in all sectors of the mining industry - the growth rate is decelerating (in comparison with the period from January to October). In the manufacturing sector, the growth rate remained at the level of the period, which ended in October, 5.2% yoy in January-November. In this sector, metallurgy remains the driver of growth - 6% yoy (6.4% yoy in January-October), which also supports the related production and transmission of electricity - 6.2% yoy (5.8% yoy in January- October).

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In November, there was an acceleration of the industrial production; it produced 5% more yoy versus 0.6% yoy in October. However, it is below the level of 7% yoy, which was observed each month almost throughout the year up to October, this affects the deceleration of the index for the entire period: 11 months of this year, to 7.3% yoy (vs. 7.5% yoy in January-October).

The index of physical volume of trade is stable at around 3% during the year: in January-November, 2.8% yoy with a slight deceleration (3.2% yoy in January-October). In terms of growth, the retail sector is leading - 6.1% yoy, while wholesale sector falls behind – with a growth at 1.2% yoy. Since real income of the population is still in the negative zone (-10% yoy in January-November), trade shows a significant dependence on the dynamics of consumer lending, the effect of deferred demand after devaluation is also one of the growth factors.

In view of increased commodity production, the transportation industry demonstrated an acceleration of rate of growth to 5% yoy (4.7% yoy in January-October).

The output of the agriculture sector shows a moderate growth of 2.3% yoy for 11 months of the current year. In the same period last year, the increase in production in agriculture in view of high harvest and favorable prices was at 4.5% yoy. During 2017, crop production slowed to 1.4% yoy (compared to 7.5% yoy in 11 months of 2016), livestock became the driver of the industry growth (+3.6% yoy in January-November).

In construction a slowdown continued, reaching almost zero growth in January-November (+0.3% yoy). A decrease in construction works was registered in East Kazakhstan (-33.5% yoy in January-November), Atyrau (-2.6% yoy), Astana (-3.5% yoy), in Kostanai region double-digit growth continues at 25.7% yoy.

The dynamics of communication industry is stable, during the year, a production was at 3% yoy, for January-November it grew by 3.2% compared to the same period last year. The active growth in the Internet (+12.3% yoy) compensates the lack of growth in mobile and telephone communications.

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Investments in fixed assets remain at an increased level, +5.7% yoy (against 6.5% yoy in January-October). During 2017, about 35% of investments were directed to the mining industry, 14% - to transport and storage, a high share is also occupied by real estate operations - 13%. Investments in oil and natural gas production are still growing at 27.1% yoy, while apparently due to a high inflow of investments into the metal mining industry last year, in 2017 this sector showed a significant decrease of 23% yoy, launch of Kashagan and completion of geological exploration works at the field caused a strong decline investments in technical services in the mining sector (-74% yoy in January-November). Investments in real estate operations increased by 13.4% yoy, agriculture (+27% yoy), production of oil refined products (+70% yoy).

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Our opinion

The main driver of growth in 2017 was an industry sector, while linked transport sector of economy also supported GDP growth.

However, starting from the third quarter of 2017, the indices of the industrial production sector began to slow down: the effect of a low base diminished, and the main driver - oil production after reaching a peak in March when considering the monthly changes no longer demonstrated a rapid growth, except for November.

We believe that this dynamics will persist - the growth in the oil production by the end of the year may slow down to 10% yoy. At the same time, the manufacturing industry, supported by stable investments in fixed assets, will grow at the current rate. As a result, according to our forecasts, industrial production will slow down to 6.6% yoy in 2017. We also expect a short-term economic indicator for the year (representing more than 60% of GDP) at 4.9% yoy. Thus, the contribution of STEI to GDP can be almost 3pp. The growth rate of the economy has been revised upward from 3.3 to 3.5-4%, which reflects higher performance in the mining sector than we expected.

An impressive GDP growth concentrated on a few sectors while consumption and demand with negative real incomes of the population were stagnating. Expansion of the capital-intensive oil industry does not imply an active creation of new jobs, as a result, despite the relatively high production rates in this sector, the growth of wages is slow, and the share of workers in this sector is not large to stimulate its growth in the economy scale.

Next year, we expect some slowdown in GDP growth to 3% due to a high base of the current year. The main drivers of growth, in our opinion, will be the moderate growth rates of capital investments as enterprises' incomes increase and lending becomes more active, and the rising production in mining and oil refining industry. Among the main risks, we note the continued dependence of the economy on shocks in foreign markets.