Pessimistic signals from retail trade and construction

Retail sales hit all-time high

According to GUS data released today, nominal retail sales growth reported by businesses having more than 9 employees slowed to 4.7% YoY in June from 5.4% in May, running below the market consensus of 5.8% and our forecast of 5.7%. Growth in retail sales in constant prices slowed to 4.4% YoY in June from 5.0% in May, running below the market consensus of 5.3% and our forecast of 5.2%. Seasonally-adjusted retail sales in constant prices grew by 1.5% MoM in June. The seasonally-adjusted retail sales growth recorded in June indicates that the upward trend in sales seen in recent quarters continues. It should also be noted that sales in constant prices hit an all-time high in June.

Year-on-year drops in retail sales growth between May and June were recorded for half of the categories reported on by GUS (‘food, beverages and tobacco products’, ‘textiles, clothing, footwear’, ‘pharmaceuticals, cosmetics, orthopaedic equipment’, and ‘others’). In the other half of the categories, sales growth rates did not change markedly between May and June. Thus, core sales, i.e. sales excluding motor vehicles, fuels, and food products sold in specialized stores, grew at a rate of 3.7% YoY compared with 4.1% for May. Despite the slight drop from May, growth was relatively high, indicating a high probability of a sustainable recovery in consumer demand.

Downside risk to private consumption forecast for this year

Today’s data signals a downside risk to our private consumption growth forecast for Q2 this year (5.1% YoY vs. 4.6% in Q1), and for H2 this year. However, we maintain our assessment to the effect that a recovery in consumer demand, supported by fast growth in real wage fund (see MACROpulse of 20/06/2023), will be, similarly to Q1, the main driver of economic growth in Q2 and throughout 2024. Such an assessment is supported by improvement seen in recent months in consumer sentiment indices that show households' appetite for major purchases currently and in the future. However, other indices (e.g. ‘change in the overall economic condition of the country’ or ‘change in the financial condition of households’) show that consumers tend to be more pessimistic. Such trends signal that recovery in private consumption growth in H2 this year will probably be less strong than expected earlier.

Construction and assembly production down again

Growth in construction and assembly production dropped to -8.9% YoY in June from -6.5% in May, running well below the market consensus of -4.6% and our forecast of -5.5%. Seasonally-adjusted construction and assembly production declined by 2.1% MoM in June. This means that after two months of growth, seasonally-adjusted production shrank again.

The decline in unadjusted production growth between May and June was driven by drops in growth in ‘construction of buildings’ (-17.9% in June vs. -5.4% YoY in May) and ‘specialized construction activities’ (-11.8% vs. -7.7%), partially offset by higher growth in ‘civil engineering works’ (-0.9% YoY in June vs. -6.6% in May). However, we believe that growth in the last category is accounted for by last year low base effects rather than actual improvement.

Such a breakdown of change in production shows that the current decline in activity is broad-based. Demand in the construction industry continues to be strongly limited by lower absorption of EU funds. The situation in housing construction is gradually improving, which is reflected in an upward trend in the number of homes in construction and home construction starts. We expect housing construction to continue to support construction activity, which will be further reinforced by National Recovery Plan projects. The scale of recovery may be smaller than earlier expected, among other things due to the postponement by the government of its new borrower support programme to 2025. This assessment is in line with the results of GUS business surveys. The expected orders index for construction did not change from its average level in Q2, and is markedly lower than in Q1.

Significant downside risk to economic growth forecast

Today’s data on retail sales and construction and assembly production in June, combined with last week’s data on industrial production for May, represents a significant downside risk to our forecast, which expects Poland’s GDP to grow at a rate of 2.5% YoY in Q2 compared with 2.0% in Q1, which entails a significant downside risk to our economic growth forecast of 2.8% YoY for the whole of 2024. We are going to present our revised macroeconomic scenario for 2024-2025 in the next MACROmap. In our opinion, the overall impact of today's data on Poland's economy is slightly negative for the PLN and yields on Polish bonds.