Construction impacted by abating investment peak

Calendar effects have limited construction-assembly production

According to GUS data, the construction-assembly production dynamics decreased to 10.8% YoY in March vs. 15.1% in February, running below the market expectations (11.7%) and above our forecast (9.8%). The main factor behind lower construction-assembly production dynamics were unfavourable calendar effects. Seasonally-adjusted construction-assembly production decreased by 0.5% MoM in March.

Construction impacted by abating investment peak

Especially noteworthy in the March construction-assembly production is lower production in the category "construction of buildings” (by 2.6% YoY vs. a 27.9% increase in February). We believe that it is a temporary phenomenon resulting mainly from an unfavourable difference in the number of working days and base effects and that it does not indicate a marked deterioration in residential construction. Our view is supported by today's reading of housing starts (up by 17.2% YoY in March).

Such tendencies are also visible in the quarterly data concerning construction-assembly production. Q1 recorded deceleration in residential construction (13.6% YoY vs. 27.2% in Q4); however, it has contributed to the decrease in the total construction-assembly dynamics (down by 1.1 pp) to a lesser extent than lower activity in the construction of non-residential buildings (7.6% YoY in Q1 vs. 16.3% in Q4, -1.8 pp). In Q1, the growth of construction-assembly production was limited the most by the ending cycle in public investments, especially visible in the category "construction of roads and motorways” (down to 5.2% YoY in Q1 from 17.4% in Q4).

We expect a gradual slowdown of construction-assembly production

In subsequent quarters we expect a deceleration in construction-assembly production growth, mainly due to the expiration of the public investment cycle (including the end of local governments' "investment peak”). Our scenario of gradual deceleration in construction-assembly production growth in 2019 is consistent with the April's GUS business survey results concerning construction. The seasonally-adjusted indicator for the current domestic orders portfolio stood at the lowest level since August 2018 and the indicator of anticipated orders (in the horizon of 3 months) at the lowest level since May 2017. Continuously high (though decreasing) activity in construction will stabilize the growth rate of industrial production.

Slightly slower GDP growth in Q1

The construction-assembly production rose by 9.9% YoY in Q1 vs. a 16.8% increase in Q4. Combined with the industrial production data published last week (see MACROpulse of 18/4/2019), the reading supports our forecast of slightly slower economic growth in Q1 (4.3% YoY vs. 4.9% in Q4 2018).

In our view, today's construction-assembly production reading is neutral for PLN and Polish bond yields.