Inventories in manufacturing grow at the fastest pace in 20 years

Further deceleration in Polish manufacturing

Polish manufacturing PMI dropped to 47.6 pts in February vs. 48.2 pts January, running below the market consensus (48.2 pts) and our forecast (48.0 pts). Thus, the index has now for four months in a row been running below the 50 pts threshold dividing expansion from contraction of activity. The index decrease resulted from lower contributions of two of its five sub-indices (for new orders and employment). Higher contribution of the sub-index for suppliers' delivery times had an opposite impact. The contributions for output and inventories have remained unchanged.

Inventories in manufacturing grow at the fastest pace in 20 years

Especially noteworthy in the structure of the February PMI is the aforementioned decrease in total new orders which has continued for four months and was faster in February than in January. Like in previous months, the decline in orders resulted from a significant decrease in export orders. It was largely caused by the sharp slowdown observed in recent months in global trade growth and the resulting decrease in manufacturing activity in the Eurozone, and in Germany in particular (see MACROmap of 25/2/2019).

February recorded subsequent increase in the sub-index for stocks of finished goods, which rose at the fastest pace since February 1999. Combined with further fast decline in production backlogs and lower indicator reflecting the expectations concerning production in a yearly horizon, this signals that the increase in stocks resulted from the surprisingly sharp decline in demand.

How long will Polish manufacturing remain resilient to the downturn in the Eurozone?

Data on export in Q4 2019 (the scale of its deceleration was the smallest among the countries of the region) and markedly better than expected data on industrial production in January (see MCROpulse of 20/2/2019) pointed to continuing resilience of Polish manufacturing to the slowdown of manufacturing activity in the Eurozone. This resilience was also signaled by the deepening in recent months difference between the PMI readings and the hard data on industrial production. However, we believe that February may have been a breakthrough month in this respect and the weakening of external demand will be more pronounced in the February data than in previous months. Thus, today's reading supports our forecast, in which production growth slowed down to 3.5% YoY in February from 6.1% in January. However, it's worth emphasizing that slower growth of industrial production has been taken into account in our forecast of GDP growth in 2019 while the fiscal package announced last weekend and having potentially significant impact on consumption poses an upside risk to this forecast (see MACROmap of 25/2/2019).

Today's business survey results for Polish manufacturing are slightly negative for PLN and yields on Polish bonds.