Slight air of optimism in manufacturing

Poland’s manufacturing PMI rose to 43.4 pts in November from 42.0 pts in October, running above market consensus (42.4 pts) and slightly above our forecast (43.2 pkt.). Thus, the index has remained below the 50-point mark that separates growth from contraction for seven consecutive months. The rise in the index is accounted for by higher contributions from four out of its five components: inventories, current output, employment, and total new orders. These rises were somewhat offset by a lower contribution of delivery times.

With regard to demand and production assessments, the November PMI report paints a picture close to that signalled in the October report. In November, businesses still signalled marked, though slightly slower than in October, drops in new orders (including export orders), current output, and employment. According to businesses surveyed, the drops in domestic and export demand were caused by high inflation, the war in Ukraine, and general uncertainty. Like in the previous five months, businesses quickly reduced backlogs of work that had grown in 2021 and Q1 2022, which eased the adverse impact of dropping demand for current output. The continued slowdown in orders and production contributed to a faster drop in businesses’ purchases of materials, the fastest since April 2020.

In our opinion, despite the continued slowdown in Polish manufacturing signalled in the November PMI report, the report is moderately optimistic. Firstly, November saw a rise in the delivery times component of the PMI to a level close to the 50-point mark. This means that delivery times for input goods do not change. This has not been seen since the end of 2019 and beginning of 2020, i.e. since the time right before the outbreak of the pandemic. This signals that global and domestic constraints in terms of accessibility of input goods caused by disruption in supply chains are diminishing (according to the businesses surveyed, ‘difficulties in sourcing materials and logistics have started to disappear’). This contributes to slower growth in the prices of these goods, as reflected in the reduction recorded in November in the PMI component for input goods prices to its lowest level since October 2020.

Secondly, the future output index for a 12-month horizon increased in November to its highest level since August 2022, while also being well above the 50-point mark separating growth from contraction. This signals that the restructuring processes launched in many business to increase productivity and reduce energy consumption, as well as the reduction in supply constraints mentioned above, led some businesses to assess their future activity more optimistically, despite the continuing decline in orders and output. The marked increase in the future output component supports our 'soft landing' scenario for the Polish economy, according to which it will avoid recession in the coming quarters, with economic growth of 1.2% for the whole of 2023.

Today's manufacturing PMI data for November supports our scenario that economic growth will slow to 0.8% YoY in Q4 2022 from 3.6% in Q3 2022. In our opinion, today’s data is slightly positive for the PLN and the yields on Polish bonds.