Weak start to Q3

Industrial production is falling again

In accordance with the GUS data, industrial production sold in enterprises employing more than 9 people dropped by 2.7% YoY in July compared to a drop by 1.1% YoY in June, running markedly below the market consensus (-0.6%) and our forecast (-1.2%). Seasonally adjusted industrial production decreased by 1.0% MoM in July compared to an 0.4% growth in June. This means that after one month of growth seasonally adjusted production, it has resumed the downward trend observed since March.

Export industries did not help this time

The main factor worsening the YoY decline in industrial production was the slowdown in industries where the bulk of sales are directed abroad (2.7% YoY in July compared with 7.2% in June). 'Electrical equipment' (-3.3% YoY in July vs. 9.7% in June) and 'motor vehicles, trailers and semi-trailers' (15.0% YoY vs. 19.7%) were mainly responsible for the slowdown in activity in export categories. The deceleration of production in the automotive industry was partly linked to the postponement (compared to 2022) of the summer holiday break at car factories.

By contrast, production growth in non-exporting industries in July were at their highest level since February 2023 (-4.8% vs. -5.1% in June). Thus, our scenario is materialising, in which the fall in inflation, pushing real wage and consumption growth up, and the increase in housing and EU co-financed investments are having a positive impact on the activity in industries where production is mainly oriented towards the domestic market. On the other hand, the significant downturn in Poland's external environment recorded in July will be a factor inhibiting the growth of activity in Polish export industries in the following months as well. The recovery in this segment of Polish manufacturing will materialise later (closer to the end of 2023) with the improvement in the situation in the Eurozone that we expect (see MACROmap of 31/07/2023).

Wages are falling again in real terms

In accordance with the GUS data published today, nominal salary growth rate in the sector of companies employing more than 9 employees fell from 11.9% YoY in June to 10.4% YoY in July, running below the market consensus (11.1%) and in line with our forecast. In real terms, after the adjustments made to take into consideration the changes in prices, wages in businesses declined by 0.3% YoY in July comparing to a 0.4% growth in June. The main factor pushing the annual wage growth down was the effects of the high base from a year ago. In fact, in July 2022, there was a payment of one-off awards in the mining industry as well as awards on the occasion of Forest Service Day or Power Industry Day, which clearly boosted salary levels. We expect nominal annual wage growth to follow a mild downward trend in the following quarters, which will also be noticeable for average wages in the economy as a whole. The main factor pushing the nominal wage growth down in the coming quarters will be the strong fall in inflation that we expect and the associated reduction in corporate wage pressures.

Restructuring processes in manufacturing hinder employment growth

Employment growth in the business sector slowed to 0.1% YoY in July, compared to 0.2% in June. It thus formed in line with the consensus and our forecast. Compared to June, employment increased by 0.9k in July. As in previous months, job cuts continue to be the main factor limiting employment growth in manufacturing (down by 3.4k MoM), confirming the continuation of the restructuring processes observed in this sector in recent months.

The drop in real wage growth and employment in the business sector translated into an decrease in real wage fund growth (the product of employment and average wage adjusted for changes in prices) in this sector to -0.3% YoY in July vs. 0.6% in June. Nevertheless, real wage fund growth was above the level recorded in Q2 (-0.5%) in July. The wage fund data is consistent with our forecast for consumption growth (+0.2% YoY in Q3 vs. -3.7% in Q2). An additional factor supporting private consumption growth in Q3 will be the cessation of the effects of the high base of a year ago related to the outbreak of war in Ukraine (see MACROpulse of 16/08/2023). It will be possible to assess private consumption trends more precisely when we see the retail sales data for July, which is to be published tomorrow.

We uphold our ‘soft landing’ scenario

We uphold our 'soft landing’ scenario for the Polish economy according to which the growth of the Polish GDP will decrease markedly in 2023, but it will remain positive and the strong slowdown in economic growth will not be accompanied by a significant increase in unemployment. Nevertheless, today's industrial production data for July combined with weaker than expected Q2 GDP data signal a slight downside risk to our 2023 economic growth forecast (0.8% vs. 5.1% in 2022).

In our opinion, the July industrial production and labour market data is slightly negative for the PLN and the yields on Polish bonds.