The constructors’ Eldorado has come to an end

According to GUS data, the construction-assembly production dynamics dropped to -0.7% YoY in June vs. 9.7% in May, running significantly below our forecast (3.0%) and the market expectations (3.8%). The sharp decline in the annual dynamics of construction-assembly production in June compared to May resulted from the statistical effect in the form of an unfavourable difference in the number of working days (in May the number of working days was 1 day higher from 2018 while in June 2019 it was 2 days lower than the year before). Seasonally-adjusted construction-assembly production increased by 0.1% MoM in June.

We believe that like in the case of data on the June industrial production (see MACROpulse of 18/7/2019), the error of our forecast resulted mostly from the underestimation of the unfavorable impact of calendar effects. The surprisingly low production in June may also, to a certain extent, be attributed to delays in the completion of road investment projects. However the negative impact of the said factors on the dynamics of construction-assembly production in June does not alter our assessment concerning the short-term outlook for the construction industry. 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 public investment 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). This scenario is supported by the data on the structure of investments in Q1 2019, showing that the nominal annual dynamics of public investments (7.4% YoY) have been the lowest since Q4 2016. In addition, GUS survey results for construction, point to a marked decrease recorded in July in the current and expected domestic orders book indicators to the lowest levels since May 2017 and February 2017, respectively.

Today's data on construction-assembly production are yet another – after the markedly weaker than expected data on the June industrial production – signal of a significant downside risk to our forecast of GDP growth in Q2 (5.0% YoY) and in the whole 2019 (4.7%). In the next MACROmap we will present our revised macroeconomic scenario for 2019-2020.

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