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Stagflation in Polish manufacturing

Slowdown in Polish manufacturing continues

The PMI index for the Polish manufacturing sector shrank from 56.0 pts in August to 53.4 pts in September, running below the market consensus (54.8 pts) and our forecast (54.5 pts). This is the third consecutive month that saw the PMI falling, the index reaching the lowest level since February 2021. The index was driven down by lower contributions of 4 out of its 5 components (new orders, current output, inventories and employment), while slightly longer delivery times had an opposite impact.

Supply barriers still there

In accordance with the press release, businesses report difficulties in getting access to raw materials and semi-finished goods, which significantly limits their production capacities. This opinion is supported by a strong decline in the current output component, which reached the lowest level since April 2021. Consequently, the businesses are forced to use their inventories to fulfil the orders, and so September 2021 saw the strongest decline in inventories since October 2017. With production costs growing, the businesses try to transfer them to customers, which causes the prices of final goods to grow again, though slightly more slowly comparing to August.

High prices stifle the demand

There are reasons to believe that businesses do not have much room for transferring costs to customers anymore. This opinion is supported by a strong decline in the new orders component, which reached the lowest level since April 2021, running only just above the 50-point level that separates growth from contraction. The decline in the new orders component was accompanied by the first decline in foreign orders since November 2020, with the index falling below 50 pts. In accordance with the press release, this reflects a weaker demand which results, among others, from a strong increase in the prices of final goods in the last couple of months.

Stagflation in Polish manufacturing

A significant production slowdown combined with a strong growth in prices shows that the Polish manufacturing sector is affected by stagflation. However, we believe that the stagflation is transitional. Our opinion is supported by the index of expected output for 12 months, which remains high. The above could be interpreted in such a way that businesses expect the prices to drop and the production and the demand to increase along with the clearing of supply bottlenecks.

Downside risk to our GDP forecast

The average PMI for Poland’s manufacturing fell from 56.8 pts in Q2 to 55.6 pts in Q3. A slowdown in activity in the Polish manufacturing sector will have a negative impact on the industrial production momentum in the months to come. Consequently, we believe that there is a downside risk to our GDP scenarios for Q3 and Q4 2021. We will present our new macroeconomic scenario in the next MACROmap. Today’s data is slightly negative for the PLN and yields on Polish bonds.