Industrial production markedly above expectations

Industrial production markedly above expectations

In accordance with the Polish Central Statistical Office's (GUS) data, dynamics of sold production of industry in enterprises employing more than 9 people dropped to 5.4% YoY in May vs. 9.3% in April, running markedly above market consensus (3.5%) and our forecast (4.5%). Seasonally-adjusted industrial production increased by 1.9% MoM in May. The main factor behind the decrease in industrial production dynamics between April and May was the unfavourable difference in the number of working days (in May 2018 the number of working days was one day lower than in 2017, while in April 2018 it was one day higher than last year).

Export-driven branches (so far) unaffected by the slowdown in global trade

Data on the May production structure indicate that the wide ranging recovery in branches with a large percentage of exports in sales ("machinery and equipment” (21.0% YoY), "other transport equipment” (10.0%), "electrical equipment” (7.3%), "computers, electronic and optical products” (6.1%) and "furniture” (6.0%) continues. This comes as a surprise considering the May PMI for Polish manufacturing, which indicated a drop in the index of new export orders below the threshold of 50 pts, separating the increase from the decrease in activity (see MACROpulse 01/06/2018). Nevertheless, we estimate that given the slowdown in global trade visible since the beginning of the year, the probability that the production growth rate in export-driven branches will decrease in the coming months is high. Moreover, the slowdown in world trade may be aggravated by further escalation of protectionist measures taken by the US in recent weeks.

Construction industry boom drives the industrial production up

Like in the previous months, also in May production was growing relatively quickly in branches related to the construction industry ("coke and refined petroleum products” (12.8% YoY) and "metal products” (10.0%)). This means that the activity in the Polish industry is driven up by the boom in the Polish construction sector, and in particular by strong recovery observed in public investments in the infrastructure (see below).

Strong recovery in the construction industry continues

In line with the data published by GUS, the construction-assembly production growth rate increased from 19.7 YoY in April to 20.8% YoY in May. The increase was reported despite the impact of the aforementioned statistical effect of the unfavourable difference in the number of working days. Seasonally-adjusted construction-assembly production increased in May 2018 by 2.6% MoM, which represents the first month-on-month increase since January 2018. Particularly noteworthy in the construction-assembly production structure is strong acceleration of production growth in the "civil engineering facilities” section, which went up to 36.8% YoY, accompanied by significant slowdown of growth in the "construction of buildings” branch (to 16.6% YoY). This, however, does not change our scenario wherein companies' investments will grow significantly in 2018, resulting in higher outlays on buildings and objects necessary to increase the production capacity. Furthermore, we uphold our forecast wherein the growth of public investments in the infrastructure peaked in Q1 2018, and the public investment growth will be gradually slowing down in the quarters to come due to last year's high base effects and supply-side constraints (shortage of skilled labour force).

Upside risk for GDP growth in Q2

Data on industrial production and construction-assembly production, which have been released today, are slightly positive for the PLN and the bond yields. At the same time they pose a slight upside risk for our GDP growth rate forecast for Q2 2018 (4.9% YoY vs 5.2% in Q1).