The risk of technical recession has again increased

Export-oriented sectors as the only engine of industrial production

In accordance with the GUS data, the volume of sold production of industry in enterprises employing more than 9 people fell by 2.9% YoY in March vs. a 1.0% drop in February, running below the market consensus (-1.9%) and our forecast (-0.7%). Seasonally-adjusted industrial production shrank by 1.0% MoM in March.

Export-oriented sectors were the only industry segment to be driving the total production up. Production growth in those companies accelerated from 2.1% YoY in February to 3.5% in March. This means that the sectors that sell most of their goods abroad are still resilient to the economic downturn seen by Poland’s main trade partners (see MACROmap of 24/04/2023). Production growth was mainly driven up by such categories as “vehicles, trailers and semi-trailers” (36.5% YoY), “electrical equipment” (20.3%), “other transport equipment” (16.8%) and “machinery and equipment” (16.0%). The activity in those sectors was strongly supported by the reduction of production backlogs amidst less severe shortages of raw materials and components. At the same time, annualised production decline in companies related to the construction sector and in other sectors deteriorated even further between February and March (-1.1% YoY vs. -0.4% YoY and -5.3% YoY vs. -2.9% YoY, respectively). It also should be noted that lower production volumes in the energy sector were an important factor driving the total industrial production growth down (by 2.2 pp. between February and March).

We continue to believe that production growth in sectors that are not focused on exports can be expected to accelerate significantly only in Q2 2023, when disinflation leads to an increase in real wage and consumption growth, and when public investments co-financed with EU funds accelerate significantly. In H2 2023, we expect the production growth to accelerate also in export-oriented sectors, supported by the expected economic upturn in the Eurozone.

Construction and assembly production well below expectations

In accordance with the data published by the GUS, construction and assembly production decreased by 1.5% YoY in March comparing to a 6.7% growth in February, running markedly below the market consensus (0.9%) and our forecast (2.5%). Last year’s high base effect was driving the construction and assembly production growth down. It is because of that effect that a decline in construction and assembly production growth was seen in all of its three main categories: “civil engineering works” (9.5% in March vs. 21.5% in February), “construction of buildings” (-10.5% vs. -2.8%) and “specialised construction activities” (-2.7% vs. 4.3%). Statistical effects make it difficult to assess trends in the construction sector based on the annual dynamics. Nonetheless, total seasonally-adjusted construction and assembly production shrank by 2.0% MoM in March, showing that the decline in activity was significant.

The short-term outlook for the construction sector is not bright again. In accordance with the business survey results published by the GUS, the indicator for construction and assembly production expected in the 3-month horizon stabilised in Q1 2023 on the lowest level since November 2020. Furthermore, the data published by the GUS today are indicative of the continuing, strong downward trend in terms of the number of construction permits (-33.0% YoY in March) and housing starts (-22.5%), which indicates that the situation in the housing construction sector is still poor. The situation might only improve after a couple of months in relation to the launching of the “Safe 2% Loan” programme. An increased demand for apartments already shows through the increasing numbers of those who apply for a mortgage loan (+16.8% comparing to February 2023). Nonetheless, it should be noted that the figure is still significantly lower than in March 2022 (by 57.6%). In turn, a relatively strong growth seen in the “civil engineering works” category results from the efforts taken by the public finances sector entities to make use of and settle in 2023 the EU funds that were made available to them within EU’s previous multi-annual financial framework (2014-2020) (see MACROmap of 13/02/2023).

Real retail sales keep on declining

In accordance with the GUS data published today, nominal retail sales dynamics reported by businesses having more than 9 employees decreased to 4.8% YoY in March comparing to 10.8% in February, running below market consensus (7.4%) and our forecast (6.0%). Retail sales in constant prices decreased by 7.3% YoY in March vs. a 5.0% drop in February, which represents the strongest drop since May 2020, i.e. since the first lockdown connected with the outbreak of the COVID-19 pandemics. Seasonally-adjusted retail sales in constant prices in March decreased by 1.3% MoM.

Annualised retail sales in constant prices dropped across many categories in March, the drop having been seen in 7 out of 8 categories reported by the GUS (except “clothing and footwear"). In our opinion, it is a consequence of households’ purchasing power decreasing as a result of high inflation. Furthermore, sales dynamics were also driven down by last year’s high base effect connected with the inflow of refugees from Ukraine and the households building their stocks in relation to the outbreak of war in Ukraine.

Today’s data on retail sales, which are indicative of a significant decline, are consistent with our scenario in which consumption will slow down significantly in H1 2023. However, we believe there is a risk that the consumption decline might be stronger than we have assumed in our forecast (-2.0% YoY in Q1 2023 and -1.0% in Q2 2023 vs. -1.5% in Q4 2022). At the same time, it is worth noting that consumers’ sentiments about the future are improving despite the current deterioration of consumption demand. GUS’s “major purchases trends in next 12 months” indicator has been following an upward trend for the last couple of months, and in April 2023 it has reached the highest value since May 2022. In our opinion, the consumers' optimism is connected with the inflation, which is dropping and, in accordance with the results of the GUS survey, expected to drop further. Should this scenario materialise, it will drive consumption up in H2 2023.

The risk of technical recession has increased

Today’s data on industrial production, retail sales, and construction and assembly production in March turned out to be worse than expected. Consequently, they carry a downside risk to our GDP growth forecast for Q1 2023 (-0.8% YoY vs. 2.0% in Q4 2022). At the same time, seasonally-adjusted retail sales and industrial production fell between Q4 2022 and Q1 2023 (by 3.0% and 0.5%, respectively). However, construction and assembly production in that period went up by 5.3%. The set of data published by the GUS today is indicative of a growing likelihood of Poland going into the so-called technical recession understood as the seasonally-adjusted GDP declining for at least two consecutive quarters (Q4 2022-Q1 2023).

Today’s data are indicative of a downside risk to our GDP growth forecast for 2023 (1.2% YoY vs. 4.9% in 2022). Nonetheless, even if this risk were to materialise, our “soft landing" scenario for the Polish economy, in which GDP growth in Poland in 2023 would remain positive, and the significant economic slowdown would not be accompanied by a significant unemployment growth, remains to be our base scenario.

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