Industrial production data have disappointed once again
In accordance with the Polish Central Statistical Office's (GUS) data, the dynamics of sold production of industry in enterprises employing more than 9 people rose to 5.8% YoY in July vs. -2.7% in June, running significantly below our forecast (7.5%) and the market expectations (6.6%). The sharp increase in the annual dynamics of industrial production in July compared to June resulted from the statistical effect in the form of a favourable difference in the number of working days (in June the number of working days was 2 days lower from 2018 while in July 2019 it was higher by 1 day than the year before). Seasonally-adjusted industrial production increased by 0.9% MoM in July.
Industry no longer invulnerable
Our forecast of industrial production in July has taken into account the positive impact on production levels of the aforementioned difference in the number of working days, the negative and temporary impact of the June heatwave on production dynamics, and the positive impact of the distribution of holidays (outages) in car factories. Nevertheless, the July dynamics of industrial production stood significantly below our forecast.
The annualized industrial production growth was also limited in July by a marked decrease (despite the favourable working days effect) in “mining and quarrying” and “electricity, gas, steam, and hot water supply” (the effect of the normalization of temperatures in July after the June heatwave). However this factor had little impact – we estimate that it lowered the annual industrial production dynamics by 0.5 percentage point.
The main reason for the disappointing data on production was, therefore, the joint impact of the downturn in Poland’s major trade partners (including the recession in German manufacturing) and the deceleration in construction (see below). This view is supported by a decreasing industrial production growth adjusted by seasonal factors. Its 3-month average stood in July at the lowest level since March 2019. In our view, the results of business surveys for Polish manufacturing indicate that the slowdown of activity in industry is sustainable and will be confirmed by data on production and exports in H2 2019.
Construction-assembly production continues to show a downward trend
According to GUS data, the construction-assembly production dynamics rose to 6.6% YoY in July vs. -0.7% in June, running slightly above our forecast (6.0%). The increase in the annual dynamics of construction-assembly production in July compared to June resulted mainly from the aforementioned statistical effect in the form of a favourable difference in the number of working days as well as the last year’s low base effect. Seasonally-adjusted construction-assembly production decreased by 0.6% MoM in July.
The data on the construction-assembly production in July are in line with our view of the short-term outlook for the construction sector. Although the construction activity will remain high in the coming quarters, we expect that the annual production dynamics will continue to show a downward trend, mainly due to the ending of the cycle in public investments (including the end of local governments' investment peak). Such tendency will also be consistent with the expected by us profile of EU funds absorption within the current programming period (see MACROmap of 10/6/2019). The growth of construction-assembly production in H2 2019 will also be limited by the disturbances in the implementation of public investments in the transport infrastructure (roads and railway), due to a sharp increase in the costs of implementing these investments. These disturbances will limit production growth in entities dealing in the construction of civil engineering facilities. Between January and July 2019, the contribution of the production realized by these entities to total annual production growth amounted to 4.2 percentage point which represented 62% of the increase in production for that period.
Slower export growth in H2 2019
Today's data on industrial production and construction-assembly production support our forecast of GDP growth in 2019 (4.4%). According to our scenario, one of the factors of the slowdown of economic growth in 2019 will be a decrease in the dynamics of exports in H2 2019 (see MACROmap of 29/7/2019).
Data on industrial production and construction-assembly production in July are slightly negative for PLN and bond yields.
