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Good data on construction output

Surprisingly strong growth in construction and assembly production

According to GUS data, construction and assembly production saw an increase to 11.5% YoY in September compared to a 3.5% growth in August, exceeding the market consensus (5.9%) and our forecast (8.5%). Adjusted for seasonal factors, construction and assembly production expanded by 3.5% MoM in August, marking its second consecutive monthly rise. The YoY growth in construction and assembly production is attributable to last year’s low base effects and an improved situation in the construction sector. This growth, however, was slightly mitigated by the unfavourable difference in the number of business days (August 2023 had the same number as in 2022, while September 2023 had one day less than the previous year).

The growth in construction and assembly production between August and September was driven up by increases across all three main categories: “specialized construction activities” (10.0% YoY in September vs. 0.9% in August), “construction of buildings” (3.9% YoY vs. -5.0%), and “civil engineering works” (17.9% YoY vs. 11.8%). The breakdown of production growth data confirms that activity in the construction sector is currently supported primarily by public finances sector entities’ efforts to make use of and settle before year-end, the EU funds that were made available to them within the EU’s previous multi-annual financial framework (2014-2020). This is facilitated by a surge in local government investments ahead of next year’s local government elections. The data from September indicates an intensification of these processes, aligning with our expectations. In the coming months, we foresee a continued upswing in construction activity, spurred by the completion of public investments co-financed with EU funds and a resurgence in housing construction, stimulated by the 2% Safe Loan program and decreasing interest rates. A revival in residential construction is signalled by the substantial production growth observed in September in the "specialized construction works" and "construction of buildings" categories. Our scenario is reinforced by the gradual improvement seen in recent months in leading indicators of economic sentiment, reflecting evaluations of the current and anticipated domestic order portfolio, as well as the projected levels of production and employment.

Q3 marks beginning of economic recovery

Today’s data on construction and assembly production, along with last week’s slightly below-expectation data on retail sales and industrial production (see MACROpulse of 20/10/2023 and 19/10/2023), aligns with our scenario where the annual GDP growth rate in Q3 will markedly increase to 0.5%, as compared to -0.6% in Q2. We believe that Q3, which, in line with our estimates, saw an increase in GDP after adjusting for the impact of seasonal factors compared to Q2, marked the beginning of the phase of economic recovery in Poland. In subsequent quarters, this recovery is expected to be fuelled by a decrease in inflation, boosting consumption growth, a revival in housing investments, and an uplift in external demand, enhancing exports and corporate investments. Referring to our ongoing assessment, which indicates a "soft landing" of the Polish economy in 2023, we observe that this process has been finalized.

In our opinion, September's data on construction and assembly production are slightly positive for the PLN exchange rate and yield on Polish bonds.