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Businesses cut margins amid weakened demand

Slight improvement in the situation in Polish manufacturing

The PMI for Polish manufacturing rose to 47.9 pts in February vs. 47.1 pts in January, which was above market expectations (47.1 pts) and our forecast (46.7 pts). Thus, the index has already been below the 50-point mark that separates growth from contraction for 22 months. The PMI increase resulted from higher contributions of 3 out of its 5 components (current output, new orders, and delivery times), while lower contributions of employment and inventories had the opposite effect.

Businesses cut margins amid weakened demand

Of particular note in the data is the slower decline in current production. This was supported by a reduction in the rate of decline in new orders inflows, including new export orders. In the case of export orders, the surveyed businesses point out that the source of the decline were lower orders from Europe, in particular Germany. In an environment of weakened demand, businesses seek to increase their competitiveness by cutting margins. What supports this assessment is the accelerated fall in the output prices recorded in February, despite the simultaneous rise in input prices. One of the reasons for the increase in the input prices was the significant lengthening of delivery times associated with the unstable situation in the Red Sea region and the consequent delays in the transport of goods from Asian countries to Europe by sea. In turn, an additional factor contributing to the fall in the output prices was the appreciation of the PLN against the EUR recorded in February.

Restructuring processes in the manufacturing sector still in progress

Against the backdrop of continued lower production and lower inflows of new orders, businesses continued restructuring processes in February. This is indicated by an accelerated decline in employment, as well as a higher rate of reduction in both final goods and intermediate goods inventories. Despite the observed restructuring processes, business assessments of future output improved in February - the PMI for output expected over a 12-month horizon increased in February to its highest level since June 2021 and remains clearly above the threshold separating growth from contraction of activity.

Return of economic recovery in Q1

The upturn in the Polish manufacturing sector recorded in February is consistent with our assessment that Poland's economic recovery will return in Q1, with annual GDP growth rising to 1.5% from 1.0% in Q4. We maintain our forecast that GDP will grow by 2.8% in 2024.

In our opinion, today’s data is neutral for the PLN and the yields on bonds.