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Worst sentiment in the Polish manufacturing sector since the outbreak of the pandemic

The PMI index for the Polish manufacturing sector shrank from 42.1 pts in July to 40.9 pts in August, running markedly below the market consensus (41.8 pts) and our forecast (41.5 pts). This means that the index has remained below the 50-point level separating growth from contraction for four consecutive months. PMI has also reached the lowest level since May 2020 (40.6 pts), i.e. since the first wave of the COVID-19 pandemic and the related lockdown. The index was driven down by lower contributions of 4 out of its 5 components (total new orders, output, employment and delivery times). An opposite impact came from a slightly higher contribution of stocks of purchases.

PMI was primarily driven down by a drop in new orders subindex, which fell from 35.6 pts to 33.4 pts (lowest since May 2020). This shows that August was the sixth consecutive month to see a month-on-month decline in the number of new orders. The decline was getting stronger with every month. At the same time, it was the second consecutive month to see the number of new export orders falling, though at a slower pace comparing to total orders. This reflects a continuing slowdown in global trade. In accordance with the PMI report, high inflation drove the customers’ shopping activity down, and consequently the expenses on discretionary (not essential) goods were lower. A growth in prices was slower over the last couple of months (for both production means and finished goods), but still the growth momentum is high.

The decline in the number of orders drove the output down at the strongest pace since May 2020. Despite output reduction, in August we could see the inventories of finished products growing for the second consecutive month due to poorer demand. This indicates that the companies are most likely to further reduce their output, adjusting it to the declining demand.

In August, the index for the production expected in a 12-month horizon went up above the 50-point level again (54.5 pts vs. 48.8 pts in July). In our opinion, it stems from statistical effects (a low base: in July, the index reached the lowest level since April 2020) rather than from actual optimism among companies. Employment trends, which are a good indicator of macroeconomic conditions confirm our conclusion. August was the third consecutive month to see the employment for the manufacturing sector fall, and it was the strongest decline in two years. In accordance with the PMI report, companies kept on expressing their concerns connected with high inflation and the risk of recession.

Today’s PMI data for the manufacturing sector supports our scenario in which the quarterly GDP growth in Q3 2022 will be negative, which means that Poland would go into the so-called technical recession, i.e. a decline in seasonally-adjusted GDP growth for at least two consecutive quarters (see MACROpulse of 31/08/2022). Our revised macroeconomic forecasts will be presented in the next MACROmap. In our opinion, today’s data is slightly negative for the PLN and yields on Polish bonds.