PMI index for Polish manufacturing dropped to 52.7 pts in May vs. 54.1 pts in April, running below our forecast equal to the market consensus (54.5 pts). At the same time, it has been the lowest level of the index since November 2016. Despite the deterioration in May, Polish manufacturing PMI continues to run clearly above the 50 pts threshold dividing expansion from contraction of activity. The decline in PMI resulted from a decrease in the contributions of all its five components (for employment, new orders, suppliers' delivery times, output, and stocks of purchases), which shows that the deterioration of business sentiment in Polish manufacturing is wide ranging.

Especially noteworthy in the data structure is lower sub-index for new orders (53.4 pts in May vs. 54.5 pts in April) with a simultaneous increase in the sub-index for new export orders (54.7 pts in May vs. 54.3 pts in April). This means that lower growth rate of orders in Polish manufacturing in May was due to weaker domestic demand. On the other hand, a rebound in foreign demand was signaled earlier by flash May PMI for German manufacturing, indicating ongoing sharp increase in output and new orders (see MACROmap of 29/5/2017). Higher sub-index for new export orders in Polish manufacturing supports our scenario of recovery in global trade.

Considering the continuing increase in activity in the German economy and the expected by us strong acceleration in public and corporate investments implemented with the use of EU funds in subsequent months (see MACROpulse of 31/5/2017), we believe that the deterioration of business sentiment in Polish manufacturing in May is temporary.

The PMI value in the first two months of Q2 stood slightly below the level of Q1 (53.4 pts vs. 54.2 pts). Thus, today's data support our forecast in which the Polish GDP growth rate will decrease to 3.7% YoY in Q2 vs. 4.0% in Q1.

Today's reading is slightly negative for PLN and yields on Polish bonds, we believe.

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