Economic growth is slowing down, wage pressure is decreasing

Surprisingly sharp slowdown of wage growth in December

In accordance with GUS data published today, nominal wage dynamics in the sector of enterprises employing more than 9 persons dropped to 6.1 % YoY in December from 7.7% in November, running way below our forecast (8.0%) and the market consensus (7.3%). Real, adjusted for the changes in prices, corporate wages rose by 4.9% YoY in December vs. 6.4% in November. According to GUS data, corporate employment increased by 0.3k MoM in December vs. a 5.1k increase in November. Consequently, as we expected, the annual employment growth dropped to 2.8% vs. 3.0% in November.

We estimate that the real wage fund growth rate (employment times average wage) in enterprises dropped to 7.8% YoY in December vs. 9.5% in November (8.8% in Q4 vs. 8.3% in Q3). The slight increase in wage fund growth in Q4 signals an moderate upside risk to our forecast of private consumption growth in Q4 2018 (4.4% YoY vs. 4.5% in Q3). In sum, today's surprising data on corporate wage growth in December suggest that, despite the skilled labour shortage signaled by enterprises, the wage pressure continues to decrease. The publication of detailed data on the wage structure in the Statistical Bulletin will enable us to verify this hypothesis. Today's reading strongly supports our scenario, in which the nominal wage dynamics in the entire economy will slightly decrease in 2019 (see MACROpulse of 18/12/2018, MACROmap of 10/12/2018).

The slowdown of economic growth in the Eurozone has reached Poland

In accordance with the Polish Central Statistical Office's (GUS) data, the dynamics of sold production of industry in enterprises employing more than 9 people dropped to 2.8% YoY in December vs. 4.7% in November, running below our forecast (3.2%) and the market consensus (5.0%). Seasonally-adjusted industrial production decreased by 0.4% MoM in December.

The sharp slowdown of industrial production growth in December was in line with our expectations. Its main reason was the slowdown of economic growth recorded in recent months in major trade partners (Germany and the Eurozone) and leading to significantly lower demand for Polish exports. The impact of lower external demand on production was for some time limited by the buffer in the form of production backlogs in Polish manufacturing. However, business survey results show that this buffer has dried out. Our view is supported by the structure of the December production, pointing to a sharp deceleration of output growth in export oriented branches: "machinery and equipment” (-4.3% YoY vs. 4.6% in November), "production of metals” (-2.8% YoY vs. 1.4%), and "metal products” (-2.0% YoY vs. 3.5%).

We expect that the impact of slower growth of manufacturing activity in the Eurozone on the activity of Polish manufacturing will grow stronger and wider in Q1. However, we maintain the view that due to the expected by us recovery in global trade starting from Q2, business climate in the Eurozone can be expected to gradually improve, resulting in an upturn in demand for Polish exports. This scenario is supported by measures taken by the Chinese authorities to stimulate economic growth in China (see MACROmap of 14/1/2019).

Public investments growth is slowing down

According to GUS data, the construction-assembly production dynamics decreased to 12.2% YoY in December vs. 17.1% YoY in November. Its decrease resulted largely from last year's high base effect though the downturn was deeper than we expected. Seasonally-adjusted construction-assembly production decreased in monthly terms by 0.2%.

Especially noteworthy in the structure of data on the December construction-assembly production is the decreasing output growth in the segment "civil engineering” (11.4% YoY vs. 20.4% in November), which after several months of declines has reached the lowest level since April 2017. This supports our scenario, in which the investment activity of the public sector (including local governments) peaked in 2018 and the dynamics of public investments will gradually decrease in the coming quarters (see MACROmap of 23/10 and 30/10/20/17). Worth noting is also a sharp increase in output growth in the segment "construction of buildings” (up to 27.5% YoY vs. 11.0% in November), pointing to further strong increase of activity in residential construction. The business survey results published by GUS indicate that the construction companies' orders portfolio was growing in November and December, which supports our scenario of gradual deceleration of construction-assembly production growth in 2019.

GDP growth to slow down in Q4

The December data on the labour market as well as industrial production and construction-assembly production support our forecast of economic growth in Q4 (4.5% YoY vs. 5.1% in Q3). In Q1 2019 we expect further slowdown of economic growth to 3.7% YoY. Our scenario is consistent with the strong deterioration of business climate observed in countries being Poland's major trade partners and in Polish manufacturing in December (see MACROmap of 17/12/2018 and MACROpulse of 2/1/2019).

Today's data on the labour market and production in December are negative for PLN and Polish bond yields.