More and more signals of consumption demand slowing down

Consumption demand still surprisingly strong

In accordance with the GUS data published today, nominal retail sales reported by businesses having more than 9 employees went up to 21.9% YoY in September comparing to 21.5% in August, running above the market consensus (21.5%) and our forecast (19.9%). Retail sales in constant prices grew by 4.1% YoY in September vs. 4.2% in August. Seasonally-adjusted retail sales in constant prices increased by 0.9% MoM in September (the second consecutive month of growth), which indicates that the consumption demand is still strong.

More and more signals of consumption demand slowing down

Even though the growth rate for retail sales in constant prices remains high, supported among others by last year’s low base effects in the “textiles, clothing and footwear” category, the data are indicating that there are more and more signals showing that the consumption growth is slowing down. Particularly noteworthy is the increasing decline in the “fuels” category of retail sales (-20.4% YoY in September vs. -14.2% in August), which shows that consumers are buying less fuel due to the strong growth in prices. As regards the data, it is also worth noting falling retail sales in the “furniture, electronic goods and household appliances” (-4.3% vs. -2.8%) and "motor vehicles, motorcycles, parts” (-2.9% YoY vs. -6.8%) categories, which indicates at a decreasing demand for durable goods among households. Business survey results published this week are also indicative of the deteriorating outlook for the consumption demand. The current consumer confidence indicator has reached an all-time low in October again, while the leading consumer confidence indicator remains at the lowest level since May 2020, i.e. since the first lockdown.

Retail sales data for July-September pose a slight upside risk to our consumption forecast for Q3 (1.1% YoY vs. 6.4% in Q2). However, we still believe that consumption will slow down significantly in the quarters to come, and the annual consumption growth will not exceed 0.5% YoY in the entire horizon of our forecast, i.e. until the end of 2023.

Construction and assembly production growth much weaker than expected

In accordance with the data published by the GUS, construction and assembly production increased by 0.3% YoY in September comparing to a 6.1% growth in August, running markedly below the market consensus (6.5%) and our forecast (8.0%). Seasonally-adjusted construction-assembly production decreased in September by 5.9% MoM.

Particularly noteworthy about the data structure is a further slowdown of construction and assembly production growth in such categories as "civil engineering works” (-2.3% YoY in September vs. -1.6% in August as a result of a limited investment activity in the public sector) and “specialised construction activities” (-4.9% YoY vs. -1.3% as a result of slowdown in terms of new investments of enterprises and housing investments). However, the growth rate in the “construction of buildings” category of construction and assembly production is relatively high (8.7% YoY in September vs. 25.7% in August). In our opinion, it resulted from the completion of private investment projects, particularly the housing ones, which had been started in previous quarters. However, it is worth noting that this effect will be fading in the coming months, driving the activity in the construction sector down. We continue to expect the activity in the construction sector to be curbed in the coming months by the growing barriers on the supply (lack of qualified workforce and a strong increase in the prices of construction materials) and demand side (poorer availability of mortgage loans and poorer demand for apartments bought for cash in relation due to the uncertainty caused by the war in Ukraine).

Low likelihood of technical recession supports further interest rate hikes

Today’s data on retail sales and construction and assembly production combined with yesterday’s data on industrial production and employment and average wages in the enterprises sector (see MACROpulse of 20/10/2022) indicate that the probability of the so-called technical recession occurrence in Poland in Q2 and Q3 2022, understood as a decline in seasonally-adjusted GDP growth for at least two consecutive quarters, is low. Consequently, they support our GDP growth forecast for Q3 (3.9% YoY vs. 5.5% in Q2). The scenario assuming that Polish economy will not go into technical recession is consistent with our forecast in which the MPC will decide to raise interest rates twice more (in November and December, each time by 25bp), and then the rate hiking cycle will come to an end, with the reference rate standing at 7.25%.

In our opinion, today’s data are neutral for the PLN and the yields on Polish bonds.