Polish manufacturing is driving on fumes
The business sentiment indicator for Polish manufacturing (PMI) dropped to 50.4 pts in October vs. 50.5 pts September, running above the market consensus (50.2 pts) and our forecast (49.9 pts). Thus, the index has reached the lowest level since October 2016 and is only slightly above the 50 pts threshold dividing expansion from contraction of activity. Conducive to the index decrease were lower contributions of three out of its five sub-indices (for employment, suppliers' delivery times, and output), while higher contributions of the sub-indices for new orders and stocks of purchases had an opposite impact.
Manufacturing is being saved by domestic orders...
Especially noteworthy in the data structure is a deepening monthly decline in new export orders, which were decreasing at the fastest rate since October 2012. Thus, the increase in the total new orders sub-index resulted from higher domestic orders which have more than offset the decrease in foreign orders. We believe that the continuing decline in foreign demand results from the slowdown observed in recent months in global trade, which limited exports in the Eurozone, including Germany, in particular, as well as the downturn in the German automotive industry. This view is supported by a downward trend observed since the beginning of 2018 for export orders in the German manufacturing (see MACROmap of 29/10/2018). We believe that the protectionist measures introduced in global trade in recent quarters had no substantial impact on the exports of goods from Poland.
... and production backlogs
The October data indicate a marked acceleration of the decline in the production backlogs sub-index, which for a third month in a row stood below the 50 pts threshold. It means that amid slow growth of new orders, the companies start clearing the production backlogs accumulated in recent quarters. Given an increasingly slow growth of new orders, this buffer will gradually dry out which points to a high likelihood of a further decline in the output sub-index in the coming months.
Slower output growth resulted in lower employment
October saw a visible decline in the employment sub-index, which stood slightly below the 50 pts threshold. It points to a first monthly decrease of employment in the Polish manufacturing since July 2013. According to Markit report, the surveyed companies were attributing employment reduction i.a to lower production. Considering a continuous decrease in the indicator of the anticipated production (for the next 12 months), which in October stood at the lowest level since January 2013, as well as the barrier in the form of skilled labour shortage, employment in manufacturing is hardly likely to increase in subsequent months.
Economic growth may slow down in Q4
The PMI for October stood clearly below its average value in Q3 (51.6 pts), which poses a downside risk to our forecast of GDP growth in Q4 (4.5% YoY vs. 4.4% in Q3). We believe that the growth of manufacturing activity in subsequent months will be limited by the slowdown in global trade; however, the acceleration in domestic demand (supported by faster investments growth) will partly offset this negative impact.