Industrial production index. The industrial production index is one of the main economic indicators of the Forex market
An increase in the indicator indicates an increase national economy, which entails an influx of investment and an increase in the value of shares of leading manufacturing companies.
Calculation features
The IPP is calculated as the ratio of the volume of goods produced in the extractive and industrial sectors for the reporting period in monetary equivalent, to the same indicator for previous period. The formula for calculating the index is as follows:
IPP = Qtek / Qbas x 100%
where Qcurrent and Qbase mean production in the current and base periods, respectively. In Russia, the IPP is calculated based on data from companies that have the most powerful production indicators. The obtained result is the basis for determining the current economic situation in the country.
Role
The IPP takes into account the performance of the main sectors of the economy. It is an average of manufacturing industry indices. It is based on physical indicators of production volume, with the exception of public services. Using an index plays an important role:
- helps determine the dynamics of socio-economic phenomena in the country;
- makes it possible to analyze the influence of various factors on overall change index;
- makes it possible to analyze the impact of structural changes on the indicator.
Calculation of the IPP gives an understanding of at what stage of the cycle economic development the state is located.
Calculation methods
The following methods are used to determine PPI:
- direct measurement;
- assessment made on the basis of information on energy costs and working hours.
To determine the indicator, it is necessary to obtain information on production volumes in certain sectors of the economy.
Rosstat receives information that serves as the basis for calculations through enterprise reporting. But the information it contains is relatively reliable. Some companies, for one reason or another, hide real data on production volumes, trying to hide their income. This gave rise to the so-called shadow economy and shadow production. This state of affairs has created a problem, since the index calculated on the basis of data from reporting does not provide an accurate picture, and there is no way to determine the influence of the shadow economy on it.
To solve the problem, the state has developed special methods that correct the calculation of the index for those sectors of the economy in which it is impossible to calculate traditional method or obtaining reliable data is difficult.
Conclusion
PPI is one of the main indicators that makes it possible to understand whether there was an increase in production or a decline in the region or the state as a whole. An increase in this indicator indicates economic growth, has a positive effect on the investment climate and is the reason for the strengthening national currency. Analysis of this indicator is very important. Excessive growth of the index can cause the economy to “overheat” and will have the opposite effect - an increase in inflationary processes. As for the decrease in the indicator, this is a direct signal for the organs state power that a set of measures should be urgently developed to overcome the crisis.
The industrial production index includes production in the main industries, therefore it can be conditionally called one of the components of the gross national product. Accordingly, the dynamics of the IPP indicate both changes in the main sectors of the economy and gross internal product generally.
In Russia there is a positive dynamics of the IPP. This suggests that the country's economy has emerged from recession and has resumed growth. The main factors that carry risks and may negatively affect this indicator are sanctions from Western countries against a number of domestic producers. After the introduction of some restrictive measures by the United States, shares of some Russian companies fell sharply. Despite the fact that the stock market has recovered, this had a negative impact on the dynamics of economic development and production in particular.
The growth of the indicator indicates the rise of the national economy, which entails an influx of investment and an increase in the value of shares of leading manufacturing companies.
Calculation features
The IPI is calculated as the ratio of the volume of goods produced in the extractive and industrial sectors for the reporting period in monetary terms to the same indicator for the previous period. The formula for calculating the index is as follows:
IPP = Qtek / Qbas x 100%
where Qcurrent and Qbase mean production in the current and base periods, respectively. In Russia, the IPP is calculated based on data from companies with the most powerful production indicators. The obtained result is the basis for determining the current economic situation in the country.
Role
The IPP takes into account the performance of the main sectors of the economy. It is an average of manufacturing industry indices. It is based on physical indicators of output, excluding government services. Using an index plays an important role:
- helps determine the dynamics of socio-economic phenomena in the country;
- makes it possible to analyze the influence of various factors on the overall change in the index;
- makes it possible to analyze the impact of structural changes on the indicator.
Calculating the PPI gives an understanding of what stage of the economic development cycle the state is at.
Calculation methods
The following methods are used to determine PPI:
- direct measurement;
- assessment made on the basis of information on energy costs and working hours.
To determine the indicator, it is necessary to obtain information on production volumes in certain sectors of the economy.
Rosstat receives information that serves as the basis for calculations through enterprise reporting. But the information it contains is relatively reliable. Some companies, for one reason or another, hide real data on production volumes, trying to hide their income. This caused the emergence of the so-called shadow economy and shadow production. This state of affairs has created a problem, since the index calculated on the basis of data from reporting does not provide an accurate picture, and there is no way to determine the influence of the shadow economy on it.
To solve the problem, the state has developed special methods that correct the calculation of the index for those sectors of the economy in which it is impossible to calculate using the traditional method or in which obtaining reliable data is difficult.
Conclusion
PPI is one of the main indicators that makes it possible to understand whether there was an increase in production or a decline in the region or the state as a whole. An increase in this indicator indicates economic growth, has a positive effect on the investment climate and is the reason for the strengthening of the national currency. Analysis of this indicator is very important. Excessive growth of the index can cause the economy to “overheat” and will have the opposite effect - an increase in inflationary processes. As for the reduction in the indicator, this is a direct signal to government authorities that it is necessary to urgently develop a set of measures to overcome the crisis.
The industrial production index includes production in the main industries, therefore it can be conditionally called one of the components of the gross national product. Accordingly, the dynamics of the IPP indicate changes in the main sectors of the economy and the gross domestic product as a whole.
In Russia there is a positive dynamics of the IPP. This suggests that the country's economy has emerged from recession and has resumed growth. The main factors that carry risks and may negatively affect this indicator are sanctions from Western countries against a number of domestic manufacturers. After the introduction of some restrictive measures by the United States, shares of some Russian companies fell sharply. Despite the fact that the stock market has recovered, this had a negative impact on the dynamics of economic development and production in particular.
Good afternoon, my dear aspiring macroeconomists. I continue my series of articles about the main factors that influence investor decision making. Today I will try to explain with my fingers how the index works industrial production, what it is, how it is calculated and what it directly affects. Make yourself comfortable.
The IPI, also known as the output index, is a simple ratio of the cost of manufactured goods produced in the current period to the cost of goods produced in the base period. Industrial production includes basic goods and services, such as:
- Mining.
- Manufacturing industry.
- Distribution of electricity, gas and steam.
- Water supply, drainage, waste disposal.
Why do you need a PPI?
The production index shows the dynamics of the development or decline of the country's economy. It is used by investors to predict future cash flows, profitability of projects, authorities - to calculate basic budget indicators, enterprises - to adjust business plans, prices, industrial production volumes.
How and by whom is the index calculated?
The IPP in Russia is calculated by Rosstat, the methodology is fixed by order No. 301 of May 8, 2014.
To calculate the index, a model is used, which is preferred in European countries, as well as the USA. It's called the Laspeyres index.
Formula for calculating the indicator
Calculations are carried out in several stages, at each of them three series of indicators are calculated:
- If we talk in simple language, here the increase in volumes in the current month or period since the beginning of the year is calculated (the generally accepted designation is t), relative to the average monthly volumes of the base year:
The base period is considered to be the period when prices, composition and quantity of goods produced were more or less stable, and no significant fluctuations were expected in the next few years.
Thus, 2008 was used as the base for 2010-2013, and from 2014 they began to use 2010.
The determination of the index of industrial production volumes is characterized by a decrease in accuracy over time, as the structure of prices and industries as a whole changes. Therefore, in the world, as a rule, the base is revised approximately every 5 years. More often, a year is chosen that ends in zero or five.
- Indices of production changes in reporting month or the period since the beginning of year t compared with the past period t-1, which are obtained by dividing the indices calculated in paragraphs 1 and 2.
Thus, we can get 3 indicators for each category of manufacturers.
Calculation using a simple example
The theory is good, but to understand the logic, let's try to calculate the indicator using an example.
As we have already said, our index consists of 4 categories, each of which has its own weight in the overall total. Let's say that in the base and current periods the results indicated in the table were obtained. We know the volume of industrial production in the base period. We can calculate the index.
| Category | Price in base period | Quantity produced in the current period | Volume in the current period | Volume in the base period | Category weight |
| Extraction of minerals fossils | 100000 | 3 | 300000 | 250000 | 56,18% |
| Processing production | 1500 | 40 | 60000 | 48000 | 11,24% |
| Production distribution of electricity, gas and steam | 3000 | 18 | 54000 | 50000 | 10,11% |
| Water supply, drainage, waste disposal | 10000 | 12 | 120000 | 120000 | 22,47% |
| Total | 534000 | 468000 | 100% |
As can be seen from the table, first of all, the volume of each category in the current period is calculated (as the product of price and quantity) and after that the weight is determined (by dividing the category volume by the aggregated indicator).
So the index is 115%.
IPP in Russia by year
Industrial production as a percentage of the previous year
| Year | Index |
| 1992 | 84,0 |
| 1993 | 86,3 |
| 1994 | 78,4 |
| 1995 | 95,4 |
| 1996 | 92,4 |
| 1997 | 101,0 |
| 1998 | 95,2 |
| 1999 | 108,9 |
| 2000 | 108,7 |
| 2001 | 102,9 |
| 2002 | 103,1 |
| 2003 | 108,9 |
| 2004 | 108,0 |
| 2005 | 105,1 |
| 2006 | 106,3 |
| 2007 | 106,8 |
| 2008 | 100,6 |
| 2009 | 89,3 |
| 2010 | 107,3 |
| 2011 | 105,0 |
| 2012 | 103,4 |
| 2013 | 100,4 |
| 2014 | 101,7 |
| 2015 | 99,2 |
| 2016 | 102,2 |
| 2017*) | 102,1 |
You can download the data here.
The index is also published every quarter and month. The calculated IPP can be found on the official website of Rosstat.
IPP in other countries
US industrial production indices and European Union called Industrial production index. They are published monthly by the Federal backup system and Eurostat respectively.
| Year | Eurozone | USA |
| 2007 | 105.9 | 114 |
| 2008 | 91.7 | 103.6 |
| 2009 | 88 | 100.3 |
| 2010 | 96.4 | 94.9 |
| 2011 | 97.1 | 95.3 |
| 2012 | 94.1 | 98.1 |
| 2013 | 96.4 | 103.2 |
| 2014 | 98 | 106.5 |
| 2015 | 100.7 | 102.9 |
| 2016 | 102.7 | 102.8 |
| 2017 | 108.5 | 105.8 |
| 2018* | 108.1 | 108 |
*As of July 2018
How does the IPP affect the country's economy, currency quotes and the stock exchange?
As we can see from the table, the industrial index correlates with the general economic condition in the country. During a crisis, it drops sharply, pointing investors, officials and manufacturers themselves to problematic industries. The indicator, unlike, for example, the index of physical volume of industrial production, is also associated with such indicators as:
- Inflation. A sharp increase in the indicator suggests that, most likely, prices for industrial goods have increased. This, in turn, could cause a round of inflation, as manufacturers of consumer goods will also be forced to raise prices due to increased production costs.
- Unemployment rate. When the indicator decreases, industrial enterprises will be forced to cut production costs by laying off workers.
- Devaluation of the national currency and Forex. An increase in the indicator contributes to the strengthening (increase) of the national currency exchange rate. As for speculation in the Forex market, participants wait every month for the publication of the indicator in order to play on its rise or fall.
Share price
I would like to address this topic separately. Since companies representing fundamental industries are mostly listed on stock exchange and form the basis for the capitalization of the entire Russian market, the industrial production index that they form shows the general state of affairs in the industry. Thus, an increase in IPP indicates an increase in production, which, in turn, improves financial indicators, which can be reflected in the price of shares of companies such as Gazprom, Lukoil, RusHydro, the largest engineering enterprises and other manufacturing giants.
How to apply this knowledge on exchanges
Experienced speculative investors keep a calendar where all important economic releases are marked, including the IPP - the days and times when it is published. On the day the news is released, they monitor whether the data coincides with expert forecasts - the so-called consensus. If yes, and the indicator increases, the market will go up; if not, it will fall.
However, over long-term investment horizons, this indicator analysts use to predict the future value of shares of a particular issuer in order to determine their growth potential. This is a rather complex and painstaking process, which is carried out by specially trained people in brokerage companies.
To summarize, I can say that the IPP is one of the main guiding indicators for an investor. For example, if we compare the GDP with GDP for similar periods, we can talk about the dynamics of production in fundamental industries compared to other areas. If the index grew faster than GDP, then industry developed faster and vice versa. This could be a good signal to buy fundamental stocks.
If you understand the processes that are taking place in the country’s economy, then it will be much easier for you to make balanced and effective solution. To do this, you just need to subscribe to this blog and read my educational program on investing. See you soon, friends!
GDP and IPP
- Mining;
- Manufacturing industries;
- Production and distribution of electricity, gas and water.
That is, this index characterizes the change in GDP due to fundamental sectors of the economy.
IPP in Russia
Companies representing fundamental industries form the basis of capitalization of all stock market RF. Such companies include: Gazprom, Lukoil, RusHydro, the largest machine-building manufacturers and so on. An increase in IPP indicates an increase in production, which, in turn, increases profits, which can be reflected in the rising value of shares of companies associated with industrial production.
Example of IPP dynamics
If the IPI decreases, the reverse process will not necessarily occur, since inflation increases the revenue and profits of producers even if real production does not grow. Let's consider a hypothetical situation that could have arisen in May 2010.
From these data we can derive three PPI indicators.
These indicators can be interpreted as follows:
- in the first 4 months of 2010, 25% of the goods and services accepted for calculation were produced, more than in the first 4 months of 2009;
- Moreover, in April 2010, 15% more was produced than in April 2009;
- however, in April 2010 it was produced 23% less than in March of the same year.
If we compare this information with changes in GDP for the same periods, we can draw a conclusion about how the volume of production in fundamental industries has changed relative to all other areas of production and services. That is, if the GDP grows faster than GDP, this indicates a faster pace of development of fundamental industries. In a situation where the API lags behind GDP growth, the opposite trend is observed.
This is a purely hypothetical situation, but, nevertheless, it allows you to understand what (PPI) represents.
Notes
Wikimedia Foundation.
- 2010.
- Singular point index
Match index
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One of the fundamental indices included in the macroeconomic indicator of any country is ( IPP, Industrial Production Index). In order to understand its significance in the country’s economy and other industries, it is necessary to study its definition.
See what "Industrial Production Index" is in other dictionaries: is a macroeconomic indicator that characterizes changes in the production process with a set of services and goods grouped by the following types All-Russian classifier of species economic activity: « Processing», « Mining», « Production and distribution of electricity, gas and water».
See what "Industrial Production Index" is in other dictionaries: is calculated monthly and takes into account changes in the physical volumes of products produced, as well as working hours spent and energy consumed.
You can also follow the industrial production index data in , and find out the next publication date of the macroeconomic indicator.
The role of the industrial production index
The output index covers the manufacturing sectors of the economy. Also, this index is average size manufacturing, mining, utilities and construction indices. It is based on physical volume measures and excludes private and public services.
The index of industrial production is an excellent method in research in cases where it is impossible to summarize, but needs to be compared. That is why one of the proven methods used in statistical calculations, which allows us to characterize changes in certain phenomena, is the index method.
The index method is designed to solve the following main problems:
- determining the characteristics of changes in the general level of complex socio-economic phenomena;
- analysis of the impact of each factor on the change in the indexed value by excluding the impact of other factors;
- analysis of the influence of structural changes on changes in the indexed value.
Calculation of industrial production index
When constructing the industrial production index, the following methods are used:
- direct measurement;
- an estimate that is based on a combination of data on working hours and energy consumption.
The index begins to form upon receipt data on production dynamics And release of goods of a certain line. Next, the division and formation of indices takes place depending on the type of economic activity.
For large populations, the index is averaged based on the constituent elements that form these populations.
When forming elementary, large and other aggregates into indices, a classification is created into groups, subgroups, sections, subsections, industrial and production areas, in accordance with the classifier of types of economic activity.
The index is calculated in the following order:
- Indices are calculated that characterize changes in production for a specific reporting period of time, for example, from the beginning of the year or month.
- Indices are calculated that characterize changes in production over a certain past period in relation to the average monthly volume of the year taken as the basis.
- Indices are calculated that characterize changes in production in the current reporting period compared to the past period, which are obtained by dividing the indices.
The calculation of the industrial production index is carried out in several stages, as well as in repeated recalculations for each individual stage.
At the initial stage, production indices are determined for each type of activity separately, by comparing the output of goods in the reporting period with their output in the base period. Also at this stage, an index of gross output is formed, but not value added.
The influence of the industrial production index on markets, the stock exchange and the country’s economy
The industrial production index has a tremendous impact on performance economic growth any country. The growth of the indicator contributes to the strengthening and appreciation of the national currency, the economy and directly affects the market itself.
On foreign exchange market The index indicator is also of great importance due to its connection with the dynamics of the business cycle. Using the dynamics of the index, in moments of anticipation of changes in the policies of central banks, it is possible to track the direction of these upcoming changes.
According to analytical data provided by competent organizations, when the production index decreases, not necessary there will be a process of decreasing the profits of enterprises, since inflation increases the revenue and profits of producers even if in reality production does not grow. This is something to ponder for any trader who considers the index a very important tool in assessing future performance, as well as assets in the market itself.
The growth of production itself has a positive effect on the balance of power in financial market, suggesting higher stock prices and positive investor sentiment. This also means strengthening the country’s economy as a whole,including strengthening positions in the macroeconomics, and this in turn entails increased competition for goods in the main world markets, resulting in an increase in the trade balance and the exchange rate of the national currency.
It is believed that the index of industrial production is not one of the important ones, but there have been cases when the use of this indicator from the economy has been useful for fundamental analysis market.
In turn, this indicates the need to consider each indicator separately if the goal is to conduct a high-quality and detailed analysis of the market and not become one of the traders who find themselves “ out of work».
Another important observation, which has been studied and fully analyzed by many analysts is the following: when the industrial production index begins to grow faster, it indicates that the fundamental industries are gaining momentum. In the case when the growth of the index lags behind the growth of the domestic gross product, there is a decline in the growth of the same industries.
Goskomstat Russian Federation publishes reports on the dynamics of industrial production, which contains data on all indicators of volume dynamics, and for each of the following industries in particular:
- fuel industry;
- ferrous and non-ferrous metallurgy;
- electric power industry;
- chemical industry;
- forest industry;
- printing;
- mechanical engineering and metalworking;
- light industry;
- medical industry;
- food industry.
In the Eurozone, data on industrial indices are distributed by Eurostat, in the USA - by the Federal Reserve System ( which takes into account index performance for adjustment monetary policy ), in Japan – by the Ministry of Economy, Trade and Industry.
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