Retail sales markedly below market expectations

In accordance with GUS data that have been released today, retail sales in enterprises employing more than 9 people decreased in current prices by 2.1% YoY in October vs. a 2.7% increase in September, running below the market consensus (-0.3%) and above our forecast (-3.9%). The sales dynamics in constant prices dropped to -2.3% YoY in October vs. 2.5% in September. Conducive to the decrease in sales dynamics between September and October was the effect of an unfavourable difference in the number of working days (in September 2020 the number of working days was one day higher from 2019, while in October 2020 it was one day lower than the year before). Seasonally adjusted retail sales in constant prices were lower by 2.1% compared to September 2020. It means that in October retail sales were by 4.1% lower from February, namely the last month before the strong impact of the pandemic on the situation in trade.

Second wave of COVID-19 pandemic has slowed down sales

The retail sales growth has visibly slowed down in October due to the negative impact of the second wave of the COVID-19 pandemic. On the one hand, households were limiting their shopping activity for fear of infection. On the other hand, the government imposed subsequent restrictions in October – yellow zone (from 10/10/2020) and then red zone (from 17/10/2020) binding in the whole country, which had a negative impact on retail trade turnovers.

These unfavourable conditions were reflected by the structure of retail sales. All categories with the exception of “furniture, radio-video and household equipment” recorded drop of sales dynamics in constant prices between September and October. In our view, the ongoing fast increase in sales in the category “furniture, radio-video and household equipment” (11.9% YoY in October vs. 8.6% in September) results from a wider scope of remote working and households’ benefitting from the period of lower mobility for home renovations.

This is only the beginning of lower retail sales

We expect that due to the unfavourable course of the pandemic in Poland and the government decision to close shops in shopping malls from 7 November, November will see a deepening of the decline in retail sales. Our view is supported by data on transactions made by the clients of our bank. Our scenario is also supported by the data published by GUS last week on consumer sentiment, pointing to a marked decrease in sentiment concerning both the current and the future situation, which stood in November at the lowest level since May. On the other hand, the government decision to open shopping malls from 28 November will support retail sales in December 2020. Considering the above factors, we see a slight downside risk to our forecast of consumption in Q4 2020 (-3.6% YoY).

Surprising increase in construction-assembly production dynamics

According to GUS data, the construction-assembly production decreased by -5.9% YoY in October vs. a 9.8% decline in September, running above our forecast (-7.6%) and the market consensus (-6.5%), Higher production growth is a surprise to the upside in the light of the aforementioned unfavorable calendar effect. The annual dynamics of construction-assembly production were supported by the last year’s low base effect (seasonally-adjusted production decreased by 5.4% MoM in October 2019). Seasonally-adjusted construction-assembly production increased by 1.8% between September and October 2020. This means that its seasonally adjusted level was ca. 14.4% lower than in February, namely before the outbreak of the pandemic.

A decrease in the construction-assembly production dynamics in October has been recorded in all the categories: “construction of civil engineering facilities” (-4.0% YoY vs. -14.5% YoY in September), “construction of buildings” (-11.3% vs. -6.3% in September), and “specialized construction activities” (-1.8% vs. -4.4%) which suggests that the decline in construction was wide ranging. The increase in the dynamics of construction-assembly production between September and October resulted mainly from higher dynamics in the category “construction of civil engineering facilities”. This may point to a recovery in public investments. However, we should be cautious about wording such conclusion due to last year’s low base effects in this category resulting from the ending of of the cycle in public investments (including the end of local governments’ “investment peak”, see MACROpulse of 22/11/2019).

Upside risk for the forecast of GDP dynamics in Q4

We maintain our scenario in which the construction activity will continue to stay at low levels in the coming months. We expect that in Q4 2020 and Q1 2021 the construction-assembly production will be limited by the second wave of the COVID-19 pandemic, conducive to further deterioration of the investment climate and lower corporate investments. This scenario is supported by a marked decrease recorded in October in GUS general business sentiment indicator for construction and a surge in the percentage of construction companies pointing to serious or threatening the company’s stability negative consequences of the coronavirus pandemic.

Today’s data on retail sales and construction-assembly production are neutral for PLN and bond yields. The released this week data on economic activity in October and business survey results for November pose a slight upside risk to our forecast of GDP dynamics in Q4 (-4.5% YoY vs. -1.6% in Q3).

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