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The collapse in construction is only seeming

Industrial production growth rate above expectations

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 3.5% YoY in October vs. 5.6% in September, running significantly above our forecast (2.2%) and the market expectations (2.6%). The decrease in the annual dynamics of industrial production in October compared to September resulted from the statistical effect in the form of an unfavourable difference in the number of working days (in September 2019 the number of working days was 1 day higher from 2018 while in October 2019 it was the same as the year before). The production growth in October was also limited by the last year’s high base effect (seasonally adjusted production increased by 1.1% MoM in October 2018). Seasonally adjusted production increased by 1.1% MoM in October 2019.

Still no signs of a substantial slowdown in export branches

It is worth pointing out that despite the unfavourable calendar effects, a relatively high yearly production dynamics were maintained in branches with a large percentage of export sales in revenues: “other transport equipment” (6.8% YoY), “electrical equipment” (13.0%), “computers, electrical and optical equipment” (10.5%), “furniture” (7.3%), “machinery and equipment” (7.5%). Thus, October was yet another month in which the activity in export branches surprised to the upside (see MACROpulse of 18/10/2019). We believe that this may be attributed to the slight improvement recorded in German manufacturing in October and signaled by higher PMI reading. According to the data released today, the improvement in German manufacturers’ sentiment continued also in November. In addition, for the first time since June 2019, the managers were expecting an output growth in the horizon of a year, which may suggest that the trend towards further recovery in German manufacturing (and thus also in Polish export branches) will continue into subsequent months.

The collapse in construction is only seeming

According to GUS data, the construction-assembly production dynamics decreased by 4.0% YoY in October vs. a 7.6% increase in September, running significantly below our forecast (6.3%) and the market consensus (6.2%). At the same time, the yearly production dynamics stood at the lowest level since February 2017. Seasonally-adjusted construction-assembly production decreased by 5.6% MoM in October.

The above-mentioned unfavourable calendar effects have contributed to the decrease in the annual construction-assembly production dynamics in October but do not fully explain its scale. The decrease in production resulted mainly from lower infrastructural investments. The production in the category “civil engineering” decreased by 8.6% YoY in October vs. a 15.8% increase in September, thus contributing to a decrease in total yearly construction-assembly production by 11 ppt between September and October. Such decrease in activity may be explained by the ending of the cycle in public investments (including the end of local governments' investment peak), smaller absorption of EU funds, and disturbances related to a sharp increase in the costs of implementing public investments in the transport infrastructure (roads and railway).

The NBP business surveys (see MACROpulse of 22/10/2019), deceleration of the downward trend for the domestic orders portfolio in construction (according to GUS surveys), and high dynamics of housing starts did not signal a slowdown in construction at such a big scale. Therefore, we believe that the decrease recorded in construction-assembly production in October is temporary. Consequently, we maintain our scenario of “soft landing” in construction.

Downside risk to the forecast of GDP for 2019

The data on construction-assembly production pose a slight downside risk to the forecast by us GDP dynamics in Q4 (4.0% YoY) and, coupled with weaker-than-expected GDP data for Q3, also mean a downside risk to our forecast of economic growth for the whole 2019 (4.4%). We will present our revised macroeconomic scenario after seeing the final data on GDP structure in Q3.

The aggregate impact of today’s data on industrial production and construction-assembly production is slightly negative for PLN and bond yields, we believe.