The peak of public investments growth in Q1?
Strong acceleration in production growth
In accordance with GUS data, dynamics of sold production of industry in enterprises employing more than 9 people rose to 9.3% YoY in April vs. 1.8% in March, running above our forecast (7.8%) and below the market consensus (9.5%). Seasonally-adjusted industrial production increased by 0.5% MoM in April. The main factors behind the increase in industrial production dynamics between March and April was the favourable difference in the number of working days (in April 2018 the number of working days was one day higher than in 2017 while in March 2018 it was one day lower than the year before) and the last year's low base effect.
Data on the April's production structure indicate that the recovery in manufacturing was wide ranging. April saw a relatively fast increase in production both in branches with a large percentage of exports in sales ("machinery and equipment” (17.0% YoY in April), "electrical equipment” (11.3%)” and "furniture” (14.9%)) and in branches related to construction ("manufacture of other non-metallic mineral products” (12.7%), "metal products” (12.6%), and "coke and refined petroleum products” (24.6%)).This means that the activity in Polish industry in April was, similar to that in previous months, supported by both strong external demand and the construction boom in Poland, in particular, by strong recovery in public infrastructural investments (see below). The total impact of these factors on industrial production in April was stronger than we had expected.
Slowdown in global trade to reduce production growth in Poland
The acceleration recorded in industrial production in April had been signaled in the manufacturing PMI readings. The PMI sub-index concerning output rose to 55.4 pts in April vs. 54.4 pts in March 2018, hitting the highest level since December 2017. What is important, in April higher values were recorded for sub-indices concerning new total orders and new export orders. Nevertheless, we estimate that the likelihood of a decrease in industrial production growth in the next few months is high. In our view, the source of the slowdown in Polish manufacturing will be a decrease in global trade dynamics, as signaled by a marked decline in the PMI sub-indices concerning new export orders in Germany and China (in China the sub-index dropped below 50 pts, hitting the lowest level since November 2016 and signaling a decline in export orders). Increased protectionism in the United States may deepen these tendencies, although, due to the current parallel negotiations between China and the US and between the EU and the US, the scale of the negative impact of this factor on Polish exports in the coming quarters is difficult to assess now.
The peak of public investments growth in Q1?
According to GUS data, the construction-assembly production growth rose to 19.7% YoY in April vs. 16.2% in March. Conducive to faster production growth rate were the above-mentioned favourable calendar effects. Seasonally-adjusted construction-assembly production dropped by 1.2% MoM in April 2018, which means third consecutive decline in production in monthly terms.
In the production structure especially noteworthy is a sharp acceleration in production growth in the segment "construction of buildings” (up to 36.0% YoY, close to the highest in the history of this category) with a simultaneous slowdown of growth in the segment "construction of civil engineering facilities” (up to 22.2% YoY, the lowest since December 2017). The changes recorded in April in the production structure are in line with our scenario, in which 2018 will see a marked increase in corporate investments resulting in higher outlays on buildings and structures necessary to increase production capacities. In addition, such production structure suggests that public investments growth peaked in Q1 2018 and in subsequent quarters, due to last year's high base effects and supply-side constraints (shortage of skilled labour), the dynamics of public investments will gradually decrease. Such scenario is supported by the marked deterioration recorded in recent months for GUS business sentiment indicator, reflecting the orders portfolio in construction.
Upside risk to GDP growth in Q2
The data published today are slightly positive for PLN and yields on Polish bonds. Combined with the better-than-expected data on GDP in Q1 2018 (see MACROpulse of 15/5/2018), they signal an upside risk to our forecast of GDP growth rate in Q2 2018 and in the whole 2018. We will present our current forecast of the structure of economic growth in Poland for 2018 and 2019 on 11 June 2018.