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The production capacity barrier is becoming more and more critical

The business sentiment indicator for Polish manufacturing (PMI) dropped to 53.7 pts in February vs. 54.6 pts in January, running below our forecast (54.5 pts) and the market consensus (54.1 pts). The indicator decreased due to lower contributions of 4 out of its 5 sub-indices (for new orders, stocks of goods purchased, output, and employment). Higher contribution of the sub-index for suppliers' delivery times had an opposite impact.

Especially noteworthy in the data structure is the drop of the sub-indices for new orders (55.0 pts in February vs. 56.7 pts in January) and new export orders (52.6 pts vs. 54.1 pts). It was reflected by a lower output sub-index (53.8 pts vs. 55.1 pts) which has dropped to the lowest level since October 2017. The decrease in the sub-index for new export orders, and consequently for total new orders, was signaled earlier by flash PMIs for the Eurozone, including Germany (see MACROmap of 26/2/2018), as the situation in Polish manufacturing is strongly dependent on the German demand for goods manufactured in Poland and used for the production of final products.

Noteworthy in the data are also the increasingly longer suppliers' delivery times. At the same time, despite a slower growth rate of orders, we observe a further increase in production backlogs. This results from the record high capacity utilization in Polish manufacturing, as signaled by numerous business surveys. The companies are trying to increase capacity utilization through increase of employment. This is shown by a continuingly high value of the employment sub-index (52.8 pts in February vs. 53.1 pts in January). In our view, the increase of employment in subsequent months will be more and more limited by the growing difficulties of companies in finding skilled labour. This will be conducive to higher corporate investments enabling to make the production technology less labour intensive and thus to increase productivity.

Poland's manufacturing PMI index between January and February stood at the same level as in Q4 2017 and amounted to 54.2 pts. This poses an upside risk to our forecast of GDP growth rate in Q1 (4.7% YoY vs. 5.1% in Q4).

Today's data are neutral for PLN and yields on Polish bonds.