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Strong impact of the war in Ukraine on sentiment in manufacturing

Marked downturn in Polish manufacturing

Poland’s manufacturing PMI fell to 52.7 pts in March from 54.7 pts in February, running slightly below market consensus (53.1 pts according to Parkiet consensus) and our forecast. The drop in the index is accounted for by lower contributions of 4 out of its 5 components (new orders, current output, inventories, and employment), partially offset by a higher delivery times contribution.

Strong impact of the war in Ukraine on sentiment in manufacturing

Russia’s invasion of Ukraine had a marked impact on March PMI survey results. What is particularly worth noting about the PMI data is a fast drop in export orders (after reaching in February the highest level since August last year, the index hit the lowest level since June 2020), which, based on information from businesses surveyed, is a result of the war in Ukraine and, consequently, drops in orders from the three countries involved in the conflict (Belarus, Russia, and Ukraine). The drop in export orders, accompanied by a drop in total orders seen for the first time since November 2021, drove down manufacturing output (the current output component fell below 50 pts for the first time since January 2021).

Stronger negative impact of supply constraints

It is worth noting that the decline in manufacturing signalled by the survey in March was caused both by the drop in demand for exports and by more severe supply constraints due to the war (bottlenecks in manufacturing). The businesses surveyed in March pointed out more severe disruptions in supply chains (longer transportation times and lower availability of raw materials and components). This was reflected in longer delivery times. The stronger impact of more severe supply constraints on activity in manufacturing is confirmed by a closure of Volswagen’s plants in Poznań and Września for two weeks, which, in our opinion, considerably added to the March slowdown in manufacturing. Moreover, the war in Ukraine contributed to faster growth in input prices and final goods prices (the highest MoM growth on record since the PMI survey began), and to growth in purchasing activity aimed to increase stocks in order to ensure production continuity.

Assessment regarding future activity less optimistic

March saw a marked drop in the index for output expected over a 12-moth horizon, which hit the lowest level since August 2020, i.e. since the time when severe disruptions to global supply chains caused by the pandemic had a negative impact on activity in manufacturing and prospects for recovery. However, the index still stands at well above 50 pts. In our opinion, this shows that the war in Ukraine is seen as a disruption that will not lead to a long lasting slump in Poland’s manufacturing activity, which will grow with supply constraints gradually easing and input prices becoming less volatile due to de-escalation of the conflict. Thus, feedback from survey respondents supports our macroeconomic scenario, which, based on the assumption of de-escalation of the conflict in Q3 this year, does not expect the slowdown in economic growth in Poland in 2022 to be significant (see MACROmap of 7/03/2022).

We believe that today’s data is neutral for the PLN and yields on Polish bonds.