Scale of demand weakening has surprised manufactures

Further deceleration in Polish manufacturing

Polish manufacturing PMI rose to 48.2 pts in January vs. 47.6 pts December, running above the market consensus (47.8 pts) and our forecast (48.0 pts). Thus, the index has now for three months in a row been running below the 50 pts threshold dividing expansion from contraction of activity. The index increase resulted from higher contributions of three of its five sub-indices (for new orders, employment, and inventories). Lower contributions of the sub-indices for output and suppliers' delivery times had an opposite impact.

Scale of demand weakening has surprised manufactures

January recorded a slight increase in the total new orders sub-index given a continuing decline in the sub-index for new export orders. This indicates that external demand has weakened further while the decline in domestic orders has slowed down in January. However, it should be pointed out that the sub-index for total new orders continues to stay visibly below the 50 pts threshold. Further decline in the sub-index for export orders was signaled earlier by business survey results for the Eurozone (see MACROmap of 28/1/2019). On the other hand, especially noteworthy in the data structure is a sharp increase in the sub-index for stocks of finished goods which stood at the highest level since February 1999. This suggests that the scale of demand weakening has surprised manufacturers.

Production is decreasing at the fastest rate since June 2009

Amid a decline in new orders, the companies were clearing their production backlogs in previous months. Consequently, the output sub-index continued to stay above the 50 pts threshold, while production backlogs were plummeting. Nevertheless, output in manufacturing has been declining for three months and in January the pace of this drop was the fastest since June 2009. This shows that the outstanding orders buffer has dried out and the coming months are likely to see further decline in output (see MACROmap of 2/1/2019).

Economic growth to slow down in Q1

The January data about business climate in Polish manufacturing and in Poland's major trading partners (see MACRO of 28/1/2019) point to a high likelihood of a deeper than we expected slowdown of economic growth in 2019. This poses a downside risk to our forecast of GDP growth in Q1 (3.7% YoY vs. 4.9% in Q4).

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