Export orders falling at the fastest rate since the COVID-19 pandemic

PMI for Polish manufacturing fell from 45.1 pts in June to 43.5 pts in July, which was markedly below the market consensus (44.5 pts) and our forecast (45.0 pts). This means that the index has remained below the 50-point level separating growth from contraction for fifteen consecutive months. At the same time, July 2023 saw the strongest decline in activity since November 2022. The index was driven down by a downward contribution of the employment, new orders, current output and delivery times components. A slightly higher contribution of inventories had the opposite impact.

Weaker demand in Polish manufacturing is the main topic of the press release published together with today’s data. The falling demand was driving the number of new orders further down. The situation looks particularly bad in terms of export orders. They were affected by the strongest drop since May 2020, i.e. since the first wave of the COVID-19 pandemic. The enterprises taking part in the survey pointed to the European market as the source of a significant decline in exports. Those responses are consistent with a clear deterioration in manufacturing in the Eurozone (particularly in Germany) seen in the July’s PMI data (see MACROmap of 31/07/2023).

With new orders falling, the enterprises’ current output was largely focused on filling outstanding orders. Consequently, production backlogs were being reduced at the fastest rate since July 2022. However, despite the efforts aimed at stabilising the output, the current output saw the strongest drop since November 2022. Poor demand also caused the enterprises to reduce their inventories of final and intermediate goods. July also saw a further drop in employment rate. In accordance with the press release, this was mainly connected with companies’ general reluctance to replace the quitting personnel with new employees amidst reduced workload.

The weak demand was also conducive to inflation pressure easing, which was reflected in a further drop in both input and output prices. It is worth noting that July saw the strongest drop in output prices in the history of the PMI survey (i.e. since mid-1998). The pricing trends seen in the Polish manufacturing sector will be conducive to the gradual inflation drop that we expect to see in Poland.

The index value for the production expected in a 12-month horizon fell from 59.1 pts in June to 56.1 pts in July. Though it did not fall below the 50-point level in July, the index still reached its lowest value since December 2022, which means that although the enterprises still treat the decline in current output and new orders as something transitional, they are nonetheless becoming gradually less optimistic about their future activities.

Today’s business survey results, and particularly the strong slowdown in the number of new foreign orders, are consistent with our downward-revised economic growth forecast for 2023 (see MACROmap of 31 July 2023). A downturn outside Poland will be an important factor slowing the economic growth. We expect the GDP growth rate to stand at 0.8% in 2023. The strong drop in input and output prices seen in today’s data will drive real domestic demand up, supporting our “soft landing” scenario for the Polish economy, in which the slowdown of economic growth will not be accompanied by a significant unemployment growth. In our opinion, today’s data is slightly negative for the PLN and yields on bonds.