Increasingly stronger signals of recovery in construction

Sharp increase in industrial output growth

In accordance with GUS data, sold production of industry in enterprises employing more than 9 people rose by 9.0% YoY in January vs. a 2.3% increase in December, which was above our forecast (7.6%) and market consensus (7.8%). Seasonally-adjusted industrial production dropped by 0.2% MoM in January, which means stabilization of manufacturing activity after two months of growth.

The main reason for the sharp increase in production growth between December and January was a favourable difference in the number of working days (in January 2017 the number of working days was higher by 2 than in January 2016, while in December 2016 it was the same as in December 2015). The increase in industrial production growth was also due to the abatement of the high base effect, related to accelerated implementation of projects co-financed with EU funds, observed in the last months of 2015 (see MACROpulse of 19/12/2016). This was reflected by a very strong increase in the annual production growth in the segment "other transport equipment” (from -43.4% YoY in December 2016 up to 30.0% YoY in January 2017).

External demand and recovery in construction boost manufacturing

Especially noteworthy in the structure of the January industrial production is a relatively high production growth in branches with a significant share of exports in the sales of products, trade goods and materials: "metals” (16.8% YoY vs. 10.4% YoY in December), "machinery and equipment” (16.3% vs. 17.9%), "motor vehicles, semi-trailers and trailers” (13.2% vs. 8.7%), "chemicals and chemical products” (13.2% vs. 10.6%), and "metal products” (12.2% vs. 15.4%). These data are in line with our scenario, in which the recovery in the global trade will boost demand for Polish exports and increase manufacturing activity in 2017. The sharp increase in the PMI sub-index concerning export orders in Polish manufacturing in January to the highest level since February 2014 (see MACROpulse of 1/2/2017) and the continuing fast growth of orders in German exports (see MACROmap of 30/1/2017) suggest good prospects for industrial production in the coming months.

The January production was also boosted by growing activity in construction. According to GUS, the construction-and-assembly production rose by 2.1% YoY in January vs. a 8.0% decline in December. The sharp increase in the annual production growth was mainly due to the above-mentioned difference in the number of working days and a slowdown of the downward trend in public investments. Seasonally-adjusted construction-and-assembly production rose by 2.5% MoM, which means growth for a third consecutive month. It is in line with our scenario of gradually higher use of EU funds and significant increase in public outlays on infrastructure in 2017 (see MACROmap of 13/2/2017). This scenario is supported by the marked increase in the construction-and-assembly production recorded in January in the segment "civil engineering” (up to 5.7% YoY vs. a 5.0% decline in December). In addition, conducive to increased activity in construction in January was the recovery in residential construction. In January, the number of completed dwellings rose by 12.5% YoY, and a sharp increase in the number of dwellings in which construction has begun (55.0% YoY) signals that this recovery is sustainable. The increased activity in construction in January was conducive to accelerated output growth in the branches of manufacturing relatively strongly related to business climate in the building sector: "other non-metallic products” (11.9% YoY vs. 9.7% YoY in December), and the above-mentioned "metals”.

Strong acceleration in sales growth

In accordance with the GUS data released today, retail sales in enterprises employing more than 9 people rose in current prices by 11.4% YoY in January vs. 6.4% in December, which was above our forecast (8.1%) and the market consensus (7.6%). The sales in constant prices rose by 9.6% YoY in January vs. 6.1% in December. Higher annual sales growth was mainly due to a sharp increase in sales growth in the category "solid, liquid and gaseous fuels” to the highest level since 2005 (up to 17.2% YoY vs. 6.2% yoY in December) and "other” (from -8.4% to 8.8%), i.e. in relatively highly volatile categories . We may expect that the increase in the annual fuel sales growth was, to a certain extent, the effect of the clearly lower average temperature in January 2017 vs January 2016 and the introduction of the so-called fuel package, whose impact on sales dynamics will abate in Q4. Especially noteworthy in the sales structure are also sharp increases in the categories "sales in non-specialized stores” (from -12.4% YoY up to 7.9% YoY) and "furniture, audio-video and household equipment” (from 5.4% up to 9.0%), suggesting continuing positive impact of the improvement in the labour market and transfers under the "Family 500+” scheme on consumer sentiment and households' consumption expenditure. In our view, the structure of the January retail sales (considerable contribution of volatile categories to growth) as well as the expected by us increase in inflation in February suggest a high probability of the annual dynamics of sales in constant prices returning to ca. 6% in February.

The data on the January retail sales, industrial production, and construction-and-assembly production, released today, suggest an upside risk to our forecast of GDP growth in Q1 2017 (up to 2.8% YoY in vs. 2.7% in Q4) and private consumption (down to 3.6% YoY vs. 4.0% YoY in Q4)(see MACROmap of 6/2/2017).

In our view the aggregate impact of today's data is positive for PLN and yields on Polish bonds.