Downturn in Polish manufacturing
Poland’s manufacturing PMI fell to 44.4 pts in June from 48.5 pts in April, running well below the market consensus (48.5 pts) and our forecast (47.0 pts). The index was thus below the 50-point threshold again, separating expansion from contraction of activity. At the same time, the index reached its lowest level since May 2020, i.e. since the first wave of the COVID-19 pandemic and the ensuing lockdown.
Demand weakens in response to higher prices
The index decreased on the back of lower contributions from all of its components: new orders, output, employment, stocks of purchases and suppliers’ delivery times. The component that contributed the most to the PMI’s contraction was output as it plummeted to 39.2 pts, down from 44.4 pts (the lowest reading since May 2020). This makes June the third consecutive month which saw a MoM decline in industrial production (see MACROpulse of 21/06/2022), with the slump accelerating. Production decreased, underpinned by the growing drop-off in new orders coupled with a reduction in new export sales (both components at their lowest since May 2020). According to the PMI report, new orders fell amid the turmoil related to the war in Ukraine and rising output prices, which suppressed domestic and foreign demand. This shows that the ability of domestic companies to pass higher production costs onto domestic and foreign customers has weakened significantly.
Strong decline in ratio of new orders to stocks
Particularly noteworthy in the structure of the June PMI is the substantial decline in the ratio (quotient) of components for new orders and stocks of finished goods. Excluding the pandemic period, in June this ratio reached its lowest level since January 2009, i.e. from the collapse of activity in global and Polish manufacturing caused by the global financial crisis. This signals that over the coming months, companies will consider their stocks of finished goods to be excessive relative to demand, leading to a reduction in the level of stocks and their contribution to GDP growth. Thus, PMI data support our scenario projecting that the record-high contribution of inventories to GDP growth seen in Q1 will not be maintained in the coming quarters, which will be conducive to a marked slowdown in GDP growth. In other words, in the coming quarters, sales of finished goods in manufacturing will largely involve the sell-off of stocks.
Supply barriers weakening, demand barriers growing
June PMI data indicate a weakening of supply barriers, which in recent quarters held back activity in manufacturing. The surveyed businesses still highlighted rising suppliers' delivery times, which, however, rose at the slowest pace since October 2020. This signals that, along with the downturn in global manufacturing, the slowdown in global trade growth, and the easing of pandemic restrictions in China, the impact of supply chain disturbances on the growth of activity in Polish manufacturing should lessen in the coming months. Thus, June data indicate that the significance of supply factors as a barrier to the growth of activity in manufacturing is decreasing, while the importance of demand factors is increasing. Such an assessment is supported by declining PMI components for input prices (lowest since November 2020) and output prices (lowest since February 2021), indicating a slower increase of prices.
Soft landing remains baseline scenario
June saw another drop in the index for output expected over a 12-month horizon as it hit its lowest level since May 2020. However, the index remains well above the 50-point mark, suggesting that the output decline in manufacturing is only temporary, which would support our “soft landing” scenario for the Polish economy, understood as a gradual decline in the average annual GDP growth in 2022-2023. However, it should be noted that the decline in manufacturing activity signalled in June’s PMI data is much faster than we anticipated. Moreover, the expected output index may fail to sufficiently account for the negative impact of disruptions in gas supplies to EU countries (mainly Germany) on demand for Polish exports in Q4 2022 and Q1 2023. We will publish our revised macroeconomic scenario, which factors in the impact of the above factors and other recent data on the Polish economy, in the upcoming MACROmap.
We believe that today’s PMI data is negative for the PLN exchange rate and yields on Polish bonds.