Phenomenal growth of corporate investments

Retail sales visibly above expectations

In accordance with the Polish Central Statistical Office's (GUS) data that have been released today, retail sales in enterprises employing more than 9 people increased in current prices by 13.6% YoY in April vs. a 3.1% increase in March, running visibly above our forecast (10.0%) and the market consensus (8.6%). The sales dynamics in constant prices increased by 11.9 % in April vs. 1.8% in March.

Calendar effects boosted retail sales

The sharp increase in real retail sales growth resulted mainly from higher sales in the categories: "food, beverages and tobacco products" (18.2% YoY in April vs. -10.4% in March) and "retail sales in non-specialized stores" (20.7% vs. -1.3%). The increase in retail sales in these categories resulted from different timing of Easter holiday. In 2019 it took place in the second half of April which supported Easter shopping in April. In 2018 it fell at the turn of March and April. Consequently, last year Easter shopping was done in the second half of March. Such shift in the timing of the holiday was conducive to lower retail sales dynamics in March 2019 and their significant increase in April.

Retail sales dynamics were visibly higher from our forecasts which factored in the impact of the above mentioned calendar effects. This signals that the strong labour market and high optimism of households (supported by high job security and the government-announced fiscal package involving sharp increase in social transfers in the form of 13th pension and benefits under the 500+ scheme) are conducive to higher households' propensity to consume. This view is supported by the increase recorded in recent months in the 6-month rolling average for the annual sales dynamics in the categories covering durable goods: "furniture, audio-video and household equipment" from 8.3% YoY in January to 14.0% in April and "motor vehicles, motorcycles and parts" (from 4.6% to 6.8%). Today's visibly better than expected data on retail sales in April, coupled with the expected demand stimulus due to the payment of 13th pension in May 2019, strongly support our forecast of consumption growth in Q2 (5.5% YoY, highest since 2008).

Activity in construction remains high

According to GUS data, the construction-assembly production dynamics rose to 17.4% YoY in April vs. 10.8% in March. The main reason behind the increase in the annual dynamics of the construction-assembly production between March and April was the statistical effect in the form of a favourable difference in the number of working (in March the number of working days was 1 day lower than in 2018 while in April 2019 it was 1 day higher than the year before). Seasonally-adjusted construction-assembly production increased by 0.5% MoM in April. Especially noteworthy in the construction-assembly production growth in April are high production dynamics in the categories "civil engineering facilities" (32.7% YoY vs. 27.1% in March) and "specialized construction activities" (18.2% YoY vs. 10.7%). These data point to ongoing high investment activity of public sector entities and - combined with the data on the structure of corporate investments in Q1 (see below) - to recovery in corporate investments.

The data on production structure also indicate further recovery in residential construction. The production dynamics recorded in April in the category "construction of buildings" stayed at low levels (3.9% YoY vs. -2.6% in March) but were limited by the last year's high base effects. High activity in construction is confirmed by an upward trend observed in the recent quarters for the number of housing starts.

Despite the solid data on the April construction-assembly production, we maintain the view that the coming quarters will see 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"). This scenario is supported by the GUS survey results for construction, pointing to a marked decrease recorded in recent months in the current and expected domestic orders portfolio.

Phenomenal growth of corporate investments

Today's reading of investments of enterprises employing at least 50 persons point to a surprisingly strong recovery of corporate investment activity in Q1. Investment outlays in this group of enterprises increased in nominal terms by 22.8% YoY (at least 12-year high) vs. 14.1% in Q4 2018. In manufacturing, which in the recent months has shown high resilience to the downturn in German manufacturing (see MACROpulse of 6/5/2019), investments accelerated from 5.6% YoY in Q4 to 17.9%. No business survey results concerning investment climate published in recent months have signaled such a strong recovery in investments.

Especially noteworthy in the structure of corporate investments in Q1 is the wide range of investment outlays growth. In constant prices these outlays increased both in the category "buildings and structures" (32.6% YoY) and in "machinery, technical equipment and tools" (13.3%), and "means of transport" (27.6%). This signals that, despite the marked downturn in Poland's main trade partners, the companies decide to increase investment outlays responding to the still high capacity utilization and fast increase of domestic demand. It means that the dynamics of corporate and total investments in the whole 2019 may stand at a much higher level than we expected.

GDP growth in 2019 close to 5%?

Data on retail sales and construction-assembly production strongly support our forecast of GDP growth rate in Q2 (4.5% YoY). In turn the data on corporate investments in Q1 signal a significant upside risk to our forecast of economic growth in the whole 2019 (4.3%). Thus today's readings are positive for PLN and bond yields.