Business sentiment in Polish manufacturing (PMI) dropped to 50.2 pts in October from 52.2 pts in September, running markedly below our forecast equal to the market expectations (52.9 pts). Thus, PMI has hit the lowest level since September 2014. The deterioration of sentiment recorded in October in Polish manufacturing resulted from a decrease of contributions concerning output, new orders, and supplier delivery times. They have jointly contributed to a decrease in PMI by 2.2 pts.

Especially noteworthy in the index structure is the decrease in the sub-index concerning new orders (including export orders) below the 50-point threshold dividing expansion from contraction of activity. This suggests a decline in both domestic and foreign demand. Interestingly, the weaker inflow of foreign orders is in conflict with the results of business surveys for the Eurozone and German, which recorded acceleration in the growth rate of output and new orders (see MACROmap of 31/10/2016).

The decline in orders contributed to a stagnation of output (50.5 pts vs. 53.5 pts in September). Combined with a negative calendar effect, it poses a downside risk to our close-to-the-consensus (1.1%) forecast of the annual dynamics of industrial production in October (0.9% vs. 3.2% in September). Slower inflow of current orders was also conducive to further decrease in production backlogs and shorter delivery times (the longest delivery times in five and a half years were recorded in September).

In our view, today's surprising decline in PMI index is of a one-off nature. Our view is supported by the October business survey results for other countries of the region (Czech Republic, Hungary) and Poland's major trade partners (Eurozone, including Germany). These reports clearly indicated higher output growth rate and stronger inflow of new orders. The increase in these indicators is a good sign for business sentiment in Polish manufacturing in the coming months. We therefore believe that an increase in Polish PMI will be recorded in November, supported by low base effect

The value of PMI in October stood at a significantly lower level than in Q3 (51.3 pts). Thus, today's data pose a slight downside risk to our forecast of GDP growth rate in Q4 (2.9% YoY vs. 2.8% in Q3). The GUS revision of GDP growth in 2015 adds uncertainty to our forecast (see MACROmap of 24/10/2016).

Today's data are slightly negative for PLN and yields on Polish bonds.

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