Companies reduce employment in reaction to the growing labour costs

Wage growth below expectations

According to GUS data published today, nominal wage dynamics in the sector of enterprises employing above 9 people decreased to 5.9% YoY in October vs. 6.6% in September, running below the market consensus (6.2%) and our forecast (6.3%). In real terms, corporate wages, adjusted for the changes in prices, rose by 3.3% YoY in October vs. a 3.8% increase in September.

The decrease in wage dynamics was largely due to the last year’s high base effect (in October 2018 the monthly wage growth reached the second highest level in history). The slowdown of wage growth rate between September and October resulted also from the statistical effect in the form of an unfavourable difference in the number of working days (in September 2019 the number of working days was 1 day higher from 2018 while in October 2019 it was the same as the year before) which was conducive to a decrease in the wage dynamics of workers paid by the piece.

We believe that the decreasing capacity utilization and increasingly conservative wage policy of companies preparing for the institutional changes in the Polish labour market have also had a growing negative influence on nominal wage dynamics in recent months. These changes, conducive to higher cost of labour, include the launch of the Employee Equity Schemes as well as the announced sharp increase in the minimum wage in subsequent years. Continuing uncertainty about the planned abolition of the limitation of the annual base for the assessment of pension and disability benefit contributions (so-called 30-fold) is also negative for wage growth. Although the government has withdrawn the draft act, the remarks of its representatives suggest that it has not been abandoned and public consultations on the issue will soon be launched.

Companies reduce employment in reaction to the growing labour costs

According to GUS data, the employment growth rate in the enterprise sector dropped to 2.5% YoY in October vs. 2.6% in September, running below the market consensus equal to our forecast (2.6%). In MoM terms, employment decreased by 2.7k in October vs. a 3.6k decrease in September. Thus, it has been the third consecutive month in which employment decreased in monthly terms. We believe that the continuing decrease in corporate employment in recent months is largely due to the restructuring processes implemented by companies in reaction to the growing costs of labour. Amid continuing low inflation in Poland’s main trade partners, the companies have limited possibilities of transferring the growing labour costs to consumers without losing the price competitiveness of their products. This problem affects in particular companies with a considerable percentage of exports sales in revenues. We believe that the restructuring processes will accelerate in the coming quarters, due to a sharp increase in the minimum wage in January 2020. Consequently, corporate employment is highly likely to decrease further in the coming quarters.

Consumption growth to slow down in Q4

We estimate that the real wage fund growth rate (the employment times the average salary) in enterprises decreased to 5.9% YoY in October vs. 6.5% in September and 6.7% in Q2. This poses a downside risk to our forecast assuming a decrease in consumption growth rate to 4.4% in Q4 vs. 4.6% in Q3.

Investments are going strong in manufacturing

The nominal dynamics of investments in the Polish sector of enterprises employing more than 50 persons dropped to 13.6% YoY in Q3 vs. 17.2% in Q2, mainly due to lower investment dynamics in the services sector, which, according to our estimates, decreased to 10.3% YoY in Q3 vs. 24.2% in Q2. On the other hand, higher investment dynamics were recorded in manufacturing (12.8% YoY vs. 12.7%), mining (22.6% vs. 13.3%), energy (24.5% vs. 19.8%), construction (-16.3% vs. -20.4%), and water supply, sewage and waste management, and remediation (34.8% vs. 15.0%). Especially noteworthy in the data structure are continuously high investment dynamics in manufacturing, despite a marked deterioration of situation in this sector in Poland and in the Eurozone. The data on investment dynamics in 50+ companies support our forecast, in which total investment dynamics decreased to 8.1% YoY in Q3 vs. 9.0% in Q2.

In our view, today’s data on salaries and employment in the enterprise sector and investments in 50+ companies are neutral for PLN and yields on bonds.