Pessimism is growing in the manufacturing sector

Poland’s manufacturing PMI fell to 42.0 pts in October from 43.0 pts in September, running in line with our forecast and below the market consensus (42.5 pts). This means that the index has remained below the 50-point level separating growth from contraction for six consecutive months. The index value was driven down by lower contributions of 4 out of its 5 components (stocks of purchases, output, employment and suppliers’ delivery times). An opposite impact came from a higher contribution of total new orders.

In accordance with the PMI report, enterprises were attributing the decline in their activity to a drop in the number of new orders. Many companies reported that the widespread economic uncertainty, high inflation, and the war in Ukraine drove the demand down, both domestic and external. Amidst the strong decline in demand, the enterprises were trying to utilise their production capacities by removing backlogs (we have been observing a drop in backlogs for the last five months).

The enterprises raised the prices of their goods due to the continuing growth in energy costs. The growth in the prices of finished goods in October was the strongest since July 2022. However, the report contains information about an increasing number of enterprises expecting the prices of materials to fall in the coming months. For this reason, companies were reducing their purchasing activity, using their stocks of purchases in the production process.

The expected drop in prices partially reflected the growing pessimism concerning short-term economic outlook, with the increasing number of companies expecting a further decline in demand as well as recession. The Future Output Index (production expected in a 12-month horizon) reached the third lowest value on record in the time series. Lower values were recorded only in March and April 2020 during the first wave of the pandemic. Companies’ growing pessimism was also reflected in continuing layoffs. October was the fifth consecutive month to see the employment rate for the manufacturing sector fall, and it was the strongest decline in two years.

Today’s manufacturing PMI data supports our scenario in which the economic growth will slow down from 3.9% YoY in Q3 to 0.5% YoY in Q4. In our opinion, today’s data is slightly negative for the PLN and yields on Polish bonds.