A slump in retail sales in April

In accordance with the Polish Central Statistical Office's (GUS) data that have been released today, retail sales in enterprises employing more than 9 people decreased in current prices by 22.6% YoY in April vs. 7.0% in March, running significantly below the market consensus (-16.9%) and above our forecast (-29.0%). The sales dynamics in constant prices decreased to -22.9% YoY in April vs. -8.9% in March. The reason for the slump in retail sales in April were numerous restrictions imposed by the government with a view to containing the spread of the COVID-19 epidemic. These measures were reflected by the deepening of the annual rate of decline in sales in the categories that were affected the most by the closing of shopping malls, such as “textiles, clothing, footwear” (decrease in sales in constant prices by 63.4 YoY vs. a 49.6% decrease in March), “furniture, audio-video and household equipment” (-16.9% vs. -16.7%), and “other sales in specialized stores” (-28.2% vs. -21.4%). The factor which limited retail sales was also a sharp increase in households’ uncertainty about the outlook for employment and income which was conducive to deepening the declines in the sales of durable goods, including in particular “motor vehicles, motorcycles and parts” (-54.4% vs. -30.9%). Last year’s high base effect, lower demand for foodstuffs bought for storing as well as the recommended social distancing which limited the Easter effect on the demand for food have contributed to a sharp decline in the annual sales dynamics in the category “food, beverages and tobacco products” (-14.9% vs. 2.5%). The effect of the temporary and sharp increase in demand for “pharmaceuticals, cosmetics, orthopedic equipment” has also abated in April (-16.0% vs. 8.8% YoY).

The worst is over but the return of consumption to pre-epidemic levels will take a long time

We expect that the annual dynamics of retail sales will visibly increase in May, mainly due to the opening of shopping malls (see MACROmap of 11/5/2020) and the signaled by GUS business survey results improvement of consumer sentiment in May resulting from the gradual lifting of restrictions which limited households’ mobility and propensity to buy. However, it should be emphasized that the synthetic (current and leading) business sentiment indicators calculated by GUS stood in May 2020 at a level close to the average for 2012, namely the period which recorded a double-digit and growing unemployment. In addition, the May business survey results published today by GUS point to only a slight improvement of the sentiment indicator in the “retail trade” category in May (-43.4 pts vs. -50.4 pts in April and the long-term average at -3.8 pts). Thus, we maintain our forecast of the annual consumption dynamics in Q2 (down to -15.0% YoY vs. a rise by 1.5% in Q1). This scenario is additionally supported by the surprisingly sharp slowdown of wage growth in the corporate sector in April (see MACROpulse of 20/5/2020).

Construction activity is again higher than expected

According to GUS data, the construction-assembly production decreased by 0.9% YoY in April vs. a 3.7% increase in March, running close to the market consensus (-1.0%) and above our forecast (-11.0%). Seasonally-adjusted construction-assembly production decreased by 1.2% MoM in April. Thus, April has been the second month in row which, despite the restrictions imposed due to the outbreak of the COVID-19 epidemic, has not recorded a slump in the construction activity. Production in April was boosted by sales in the category “civil engineering constructions”, which, despite a high last year’s base, rose by 9.3% YoY vs. a 0.4% decrease in March. On the other hand, marked declines in sales were recorded in “specialist construction works” (-4.8% YoY, the sharpest annual decline since February 2017) and “construction of buildings” (-8.9%, the deepest decline since December 2016). Such structure of the April construction-assembly production indicates that the main factor which has limited its decline were continued public investments.

Ahead is a marked deterioration in construction

Despite the small scale of the construction-assembly production decline in April, we maintain the view that the situation in construction will significantly deteriorate in few months’ time. This view is supported by the sharp decrease recorded in April in GUS business sentiment indicator reflecting the current level of the orders portfolio of construction companies (micro, medium-sized, and large companies). In addition, construction activity in the coming quarters will be limited by increased uncertainty about the spread of the COVID-19 epidemic which reduces the investment plans of companies. This view is supported by business survey results published today by GUS pointing to the recorded in May increase in the total percentage of companies indicating “negative and serious” and “threatening company stability” consequences of the COVID-19 pandemic for the business of enterprises in manufacturing, construction, wholesale and retail trade as well as transport and warehouse management (a stable total percentage of companies was recorded only in “catering and accommodation”). In addition, we are still waiting for a visible decrease in gross fixed capital formation of local governments (the effect of savings amid the difficult financial situation caused by the COVID-19 epidemic), which is in line with the government view presented in the update of the 2020 Convergence Program (decrease in public investments by ca. 4% in 2020). We also believe that households’ investments (purchase of apartments for own needs and for investment purposes) will decrease in subsequent quarters due to the deterioration in the labour market (see MACROmap of 20/5/2020). The released yesterday data on industrial production, indicating a sharp production decline in companies supplying the construction industry are in line with the scenario presented above.

Coupled with the data on industrial production released yesterday, today’s data on retail sales and construction-assembly production, signal a downside risk to our forecast of economic growth in Q2 (-8.9% YoY) and in whole 2020 (-3.8%) and are negative for PLN and for yields on Polish bonds.

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