Data on construction confirm the slowdown of public investments

According to GUS data, the construction-assembly production dynamics decreased by 4.7% YoY in November vs. 4.0% drop in October, running above our forecast (-6.0%) and below the market consensus (-4.4%). Seasonally-adjusted construction-assembly production increased by 3.0% MoM in November. It is worth emphasizing that the decrease in the annual dynamics of industrial production in November compared to October resulted from the statistical effect in the form of an unfavourable difference in the number of working days (in November 2019 the number of working days was 1 day lower from 2018 while in October 2019 it was the same as the year before).

Especially noteworthy in the structure of November construction output is the drop in production in the category “civil engineering” (7.0% YoY in vs. a 8.6% decrease in October). Thus, November was the second month in a row in which a significant drop in production in this category was recorded on an annual basis. This is the case for the first time since 2016, i.e. the year in which there was a strong decline in public investment associated with the bottom of the cycle of EU funds’ utilization. In our view this data confirm the ending of the cycle in public investments resulting from the end of local governments' investment peak, smaller absorption of EU funds, and disturbances related to a sharp

increase in the costs of implementing public investments in the transport infrastructure (roads and railway).

We maintain a scenario of "soft landing" in construction

In the coming quarters, a factor limiting the activity in the category of "civil engineering " will be the deep decline in local government investments (see MAKROmap from 9/12/2019). Our expectations are supported by a fall in production in the "specialized construction works" category in November by 12.8% y/y (the lowest dynamics since 2016) against an increase of 0.4% y/y in October. Given the nature of the activities included in this category (i.a. works related to site preparation and finishing works), the strong decline in activity in this area can be interpreted as a signal confirming a sustained slowdown in growth of construction output. Despite this, taking into account the results of the business climate surveys and the expected medium-term profile of absorption of EU funds, we maintain our scenario of a "soft landing" in construction. In the coming quarters, high activity in housing will remain a factor limiting the scale of the slowdown in growth of construction output.

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