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Retail sales are positive again, situation in construction is deteriorating

Retail sales are positive again

In accordance with GUS data that have been released today, retail sales in enterprises employing more than 9 people increased in current prices by 2.7% YoY in July vs. a 1.9% decrease in June, running significantly above the market consensus (-0.4%) and our forecast (0.1%). The sales dynamics in constant prices rose to 3.0% YoY in July vs. -1.3% in June. It is worth noting that sales dynamics increased between June and July in spite of an unfavourable difference in the number of working days (in June 2020 the number of working days was higher by 2 from 2019, while in July 2020 it was the same as the year before) and last year’s high base effect. In our view, the reasons for the further increase in retail sales were the continuing postponed demand effect (increase in the households’ expenditures not made due to the restrictions binding between March and May) and the increase recorded in July in the wage dynamics amid the slowdown of employment decline in the corporate sector (see MACROpulse of 19/8/2020.

Postponed demand effect is beginning to abate

Especially noteworthy in the structure of retail sales data is further increase in the sales dynamics i.a. in the categories: “motor vehicles, motorcycles and parts” (0.7% YoY in July vs. -6.4% in June), “textiles, clothing and footwear” (5.3% vs. -3.7%), and “pharmaceuticals, cosmetics and orthopedic equipment” (0.0% vs. -8.6%). It is worth noting however that the increase in the sales dynamics in some of these categories was lower in June than in the previous months, which in our view indicates that the postponed demand effect that has recently boosted sales dynamics is slowly beginning to abate. Noteworthy are also higher sales dynamics in the categories “food, beverages and tobacco products” (-1,0% YoY in July vs. -5.0% in June) and “solid, liquid and gas fuels” (-2.8% vs. -10.9%). In our view, higher sales dynamics in these categories can be partly explained by a bigger number of Poles spending holidays in Poland and by gradual return of employees to offices which supports higher demand for fuel used in private means of transport. Considering the deterioration of consumer sentiment recorded in August and the gradual abatement of the postponed demand effect, today’s data support our scenario of a slowdown of retail sales growth in the coming months. Consequently, we maintain our forecast in which consumption will decrease by 3.8% YoY in 2020 vs. a 3.9% increase in 2019 and will increase by 4.4% in 2021.

Further slowdown in construction activity

According to GUS data, the construction-assembly production declined by 10.9% YoY in July vs. a 2.4% decrease in June, running markedly below the market consensus (-4.2%) and our forecast (-6.1% YoY) The decrease in the annual dynamics of construction-assembly production resulted from the aforementioned working days effect. Seasonally-adjusted construction-assembly production decreased by 3.6% MoM in July, which points to a widening decline in construction activity. A decrease in the construction-assembly production dynamics has been recorded in all the categories: “construction of civil engineering facilities” (-16.9% YoY in July vs. -1.2% in June), “construction of buildings” (-7.6% vs. -5.7%), and “specialized construction activities” (-2.9% vs. 0.2%). Such data structure suggests a wide range of the decline in both private and public investments, which is consistent with our view that has been repeated in previous months (see i.a. MACROpulse of 23/6/2020). The deceleration in construction in July has been signaled earlier by the decrease recorded in July in the dynamics of industrial production in branches responsible for the supply of source materials and materials used in construction projects (see MACROpulse of 20/8/2020).

Deterioration in construction is negative for investments outlook

We maintain our scenario in which the situation in construction will significantly deteriorate in H2 2020. This scenario is supported by a sharp deterioration in the investment climate in enterprises, the fact that GUS business sentiment indicator reflecting the current level of the orders portfolio of construction companies continues to stay at a very low level (significantly lower than during the bottom of the cycle in construction recorded in 2013), expected visible decrease in road investments in 2020, as compared with 2019, and fixed capital formation of local government units as well as marked decrease in residential construction activity.

The aggregate impact of today’s better-than-expected data on retail sales and weaker-than-expected data on construction-assembly production in July is neutral for PLN and bond yields. At the same time, they do not alter our forecast, in which the Polish GDP will decrease by 3.8% in 2020 vs. a 4.1% increase in 2019 and will increase by 3.6% in 2021.