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72 Opinion
most likely due mainly to residential construction, although
infrastructure work did not fare well either.
Construction of buildings fell by 10.5% y/y in March. This is a result of the still difficult situation in the housing market, primarily related to the sharp rise in interest rates. The number of housing units under construction has clearly fallen from last year's peaks, but still remains at historically high levels. Developers are most likely finishing projects already underway, but not starting new ones. With current demand, the apartments already on offer will cover demand for at least a year. The situation is unlikely to improve anytime soon, especially since some potential buyers may be waiting for details of the government support programme.
In the case of other categories, we are most likely to see the effects of the completion of public investments in the last accounting year of the "old" EU budget. Civil engineering construction increased by 9.5% y/y, but specialised works fell by 2.7% y/y. Public investment is likely to offset poor private outlays this year.
Strong decline in PPI inflation
Producer price index (PPI) growth slowed to 10.1% y/y in March (ING: 10.8%; consensus: 11.2%) from 18.2% y/y in February (revised). The main reason for the strong y/y decline in PPI inflation is the very high reference base. In March 2022, producer prices rose 6.6% m/m, with prices in the division that includes refined petroleum products rising more than
MACRO ADVISORY
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30% m/m. Compared to February, producer prices declined by 0.8% in March 2023. This was the fifth consecutive month of monthly price declines in manufacturing. Prices in the energy and power generation segment also fell markedly (-3.4% m/m).
The next few months will bring a continuation of PPI disinflation, and producer prices should rise at a single-digit pace as early as April. PPI inflation has climbed noticeably more strongly than CPI, and the same will be true in the reversal phase, i.e., the decline in producer inflation will be considerably more dynamic than in consumer prices.
Monetary policy outlook
Despite the strong deceleration of the economy and the disinflation trend that has begun, we do not share market expectations for interest rate cuts before the end of this year. The trajectory of core inflation points to strong persistence in price increases, which will require interest rates to remain at their current high levels for an extended period. It is noteworthy that in recent weeks the National Bank of Poland has changed its rhetoric and retreated from earlier declarations of readiness to ease monetary policy before the end of 2023, which would have been premature. In our view, the first NBP rate cuts will take place at the end of the third quarter next year.
Piotr Poplawski is a senior economist for Poland at ING in Warsaw. This note first appeared on the ING portal.
Mongolia, surfing the seven Cs Chris Weafer of Macro-Advisory
This time last year Mongolia faced a difficult future, with a high risk of debt default. The country’s main trade partner, China, had mostly closed its borders (part of the Covid- zero policy) and reduced imports of coal and copper, Mongolia’s two most important exports. The country has experienced protests in April 2022 as people expressed frustration at government failures and the poor economic outlook.
Since then, the outlook for the economy has greatly improved and the country’s financial position is also considerably better. There is no risk of default, and the country should be able
to reduce its debt burden to a more comfortable level in the coming years.
GDP is set to expand by at least 6% this year (from 4.8% in 2022 and only 1.4% in 2021). Inflation, which has averaged over 13% for the past wo years should fall below 10% later this year. The trade balance is expected to expand to $4.5bn,
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double that of 2021, and the budget deficit should fall to 2.5% of GDP (versus a deficit of 3.6% last year).
The reasons for the improvement in the country’s current position and in the outlook, can be summarized under “Seven Cs”.
China. Beijing has dropped its previous highly restrictive Covid- Zero policies. It means the border is now fully open and imports of materials, to fuel the economic recovery, are flowing in. Over 90% of Mongolia’s exports are such materials and 80% of all exports are to China. The border closure had the most damaging effect on the economy in 2021 and up to last autumn, while its reopening is having the biggest positive effect.
Copper. The underground section of the Oyu Tolgoi mine has now commenced production (in early March) and should triple the production of copper concentrate from the mine. Previously, production from the open-top mine averaged