End of EU stimulus in the construction sector
In accordance with the data published by the GUS, construction and assembly production dynamics declinded to -6.1% YoY, down from 14.0% in December, running well below the market consensus (8.1%) and our forecast (3.0%).
Notably, the growth rate in construction and assembly plummeted despite the statistical effect of a favourable difference in the number of working days between December and January (in December 2023, there were 2 more working days than in December 2022, while in January 2024 the number of working days was the same as in January 2023). The most significant factor contributing to the deceleration of production growth between December and January (by 12.8 pp) was the slowdown in the "civil engineering" category, which saw a -10.5% YoY decline in January, a stark contrast to the 19.2% increase in December. This slowdown was mainly due to the diminishing impact of public finance sector entities rushing to use and allocate EU funds available under the previous 2014-2020 EU multiannual financial framework before the end of 2023. The reduced absorption of EU funds is expected to continue hindering the construction sector's recovery in the coming months.
Adverse weather conditions also to blame
Adjusted for seasonal factors, construction and assembly production fell by 16.5% MoM in January. It is important to highlight that this decline in seasonally-adjusted production was considerably more pronounced than during the previous pause between the two prior seven-year EU financial frameworks (January 2016, which saw a -5.5% MoM drop). The decline in construction activity this January was further exacerbated by unfavourable weather conditions (low temperatures coupled with heavy snowfall). Consequently, a slowdown in the growth of construction and assembly production between December and January was also noted in the other two categories: "specialised construction activities" (0.5% YoY in January vs. 4.7% in December) and "construction of buildings" (-7.3% vs. 13.7% YoY). These two categories contributed less (by a combined 7.5 pp) to the overall decline in the growth of construction and assembly production in January than the previously mentioned "civil engineering".
Drop in production expected to be short-lived
In February, we expect a recovery in seasonally-adjusted production on a month-to-month basis, as well as an improvement annually, due to the fading high base effects and diminishing adverse weather conditions. Nonetheless, the annual growth rate is likely to remain negative. In the months ahead, we anticipate a gradual recovery in the construction sector, supported by the observed incremental improvements in leading economic indicators for this industry over recent months. Activity in the construction sector in 2024 will benefit from the upcoming local elections, the implementation of projects under the National Recovery Plan, and the impacts of the 2% Safe Loan program.
Today's construction and assembly production data, when combined with yesterday's released industrial production figures (see MACROpulse of 20/02/2024), do not change our forecast for the annual GDP growth rate in Q1 (projected at 1.5% YoY vs. 1.0% in Q4 2023).
We believe that today's data is slightly negative for the PLN exchange rate and yields on Polish bonds.
