Construction activity markedly below expectations
According to GUS data, the construction-assembly production decreased by 5.1% YoY in May vs. a 0.9% decrease in April, running significantly below our forecast equal to the market consensus (-0.5%). Thus, May has been the first month since the outbreak of COVID-19 which recorded a marked decline in the construction activity. Seasonally-adjusted construction-assembly production decreased by 3.1% MoM in May.
The main factor behind the decline in the construction-assembly production dynamics in May was lower production among entities building civil engineering facilities (down by 4.9% YoY vs, a 9.3% increase in April). Production dynamics in the two remaining categories (“specialized construction activities” and “construction of buildings”) stood in May, respectively, at a level close to that recorded in April (-5.1% YoY vs. -4.8%) and higher (-5.3% vs. -8.9%). Such structure of the May construction-assembly production indicates that the main factor deepening the decrease in production in May was the slowdown of activity in public investments.
This is only the beginning of a decline in construction activity
Today’s data are consistent with our view from the previous month (see MACROpulse of 22/5/2020) that the situation in construction will significantly deteriorate in few months’ time. Besides the arguments we raised then (i.a. sharp decrease in GUS business sentiment indicator reflecting the current level of the orders portfolio of construction companies, increased uncertainty about the spread of the COVID-19 epidemic which limits the investment plans of companies, and the expected visible decrease in gross fixed capital formation of local governments) such tendencies are supported by the increase recorded in June by GUS business survey in the percentage of companies anticipating payment backlogs to appear or intensify (up to 65.5% from 62.8% in May). In addition, the indicator of general business climate in construction, despite an increase in June, continues to stay at a markedly negative level. Additionally, the data released today by GUS point to a marked decrease in residential construction activity. The number of dwellings in which construction has begun decreased by 27.1% in May vs. a 12.7% decrease between January and April 2020, while the number of building permits decreased by 28.3% YoY in May vs. a 5.2% decrease between January and April.
Today’s data on construction-assembly production in May support our forecast of economic growth in Q2 (-10.5% YoY) and in whole 2020 (-3.8%) and are slightly negative for PLN and for yields on Polish bonds.