Public investments are in full swing

Industrial production slightly below expectations

In accordance with GUS data, dynamics of sold production of industry in enterprises employing more than 9 people dropped to 7.4% YoY in February vs. 8.6% in January, running below our forecast (8.3%) and the market consensus (8.1%). Seasonally-adjusted industrial production increased by 1.3% MoM in February.

Strong external demand and boom in construction support industrial production

Especially noteworthy in the structure of the February industrial production is the sharp acceleration of output growth in the segment "electricity, gas, steam and hot water supply” (from 3.7% YoY in January to 14.1% in February), largely related to a relatively cold winter in the second half of the month. We estimate that the rise in the production dynamics in this segment increased the annual industrial production growth rate by 0.8 pp. Worth noting is also the visible deceleration in output growth in manufacturing (from 9.7% YoY in January down to 7.3% in February), limited mainly by the difficulties of companies in finding skilled labour and a slight deterioration in the business climate in the Eurozone manufacturing (see MACROmap of 26/2/2018).

The value of production of the sectors of industry which recorded higher output in February in annual terms represented 83.2%.This shows that the recovery in manufacturing is wide ranging. Like in previous months, we saw a relatively fast increase in output both in segments with a considerable share of exports in sales ("machinery and equipment” (20.5% YoY in February), "electrical equipment” (10.8%), "furniture" (10.0%)) and in segments connected with the construction sector (”other non-metallic mineral products” (13.4%), "metals” (15.6%), and "coke and refinery products” (17.0%)). It means that activity in Polish industry is supported by strong external demand and boom in domestic construction, in particular strong recovery in public infrastructural investments (see below).

Boom in public investments

According to GUS data, the construction-assembly production growth dropped to 31.4% YoY in February vs. 34.7% in January. Conducive to slower production growth rate were the unfavourable weather conditions, although the February output growth rate was clearly higher from our expectations. This signals a stronger than we expected recovery in construction, supported mainly by significant increase in the investment activity of the public sector. This view is supported by very high production growth recorded in February in the segment "construction of civil engineering facilities” (65.0% YoY, the second fastest increase in history). This shows that the construction-assembly production growth is boosted by outlays on public infrastructure (roads, railways, utilities). The production in this segments is additionally supported by temporarily increased investment activity of local government units due to the municipal elections scheduled for autumn.

Upside risk to our forecast of GDP dynamics in Q1 2018

The data on industrial production and construction-assembly production, published today – combined with the January data (see MACROpulse of 20/2/2018) - pose a slight upside risk to our forecast of GDP growth rate in Q1 (4.7% YoY vs. 5.1% in Q4 2017). The data are neutral for PLN and bond yields.